Elasticity of Demand

Elasticity of demand refers to the degree of change or responsiveness of demand to a given change in the variable, such as change in price of the good, change in income of the consumer or change in the prices of the related goods (substitute goods or complementary goods). The term elasticity denotes whether the demand is responsive to change in these variables, and if it does respond, then what is the extent of response, i.e. high, moderate or low. Since there are many variables affecting the demand, we can study this response by taking one variable at a time and assuming that other variables do not change. Thus we can study the responsiveness of demand for a particular good X to change in price of that good X. this degree of response of demand to price of a good is called the price Elasticity of Demand. Similarly, we can find the response of demand for a good X to changes in consumer’s income. This responsiveness of demand to income change is called income Elasticity of demand. We can also study the responsiveness of demand for good X to changes in prices of good Y (which may be a substitute of good X) or another good Z (which may be a complementary good to X). This degree of change in the demand for good X to the changes in the prices of the other goods is called Cross Elasticity of Demand. In the following pages we discuss these three types of elasticities of demand.