Question

What do you understand by elasticity of demand ?

Hint:

Think of "elasticity" as "sensitivity" or "responsiveness." High elasticity means high sensitivity. If the question doesn't specify the type, it is usually safe to assume it refers to price elasticity of demand.

Answer 1

Step 1: Understanding the Concept:
The Law of Demand tells us the direction of the change in quantity demanded when price changes, but it doesn't tell us the magnitude of that change. Elasticity of demand is a quantitative measure that fills this gap. It measures "how much" the quantity demanded changes in response to a change in a variable affecting demand.

Step 2: Detailed Explanation of Types:
While the term can refer to any determinant, it most commonly refers to **Price Elasticity of Demand (\(E_p\)). \begin{itemize} \item Price Elasticity of Demand (\(E_p\)): It measures the percentage change in the quantity demanded of a good in response to a one percent change in its price. \[ E_p = \frac{\text{% Change in Quantity Demanded}}{\text{% Change in Price}} \] Based on its value, demand can be: \begin{itemize} \item Elastic (\(|E_p| > 1\)): Quantity demanded is highly responsive to price changes. \item Inelastic (\(|E_p| < 1\)): Quantity demanded is not very responsive to price changes. \item Unitary Elastic (\(|E_p| = 1\)): The percentage change in quantity demanded is equal to the percentage change in price. \end{itemize} \end{itemize} Other important types of elasticity include: \begin{itemize} \item Income Elasticity of Demand (\(E_y\)): Measures the responsiveness of quantity demanded to a change in consumer income. It helps classify goods as normal or inferior. \item Cross Elasticity of Demand (\(E_c\)): Measures the responsiveness of the quantity demanded of one good to a change in the price of another good. It helps classify goods as substitutes or complements. \end{itemize}