Measurement of Elasticities
Elasticity is a measure of a variable’s sensitivity to a change in another variable. In business and economics, elasticity refers to the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service’s price. It is all about the Measurement of elasticities.
Elasticity of Demand: A Measurement of responsiveness of quantity demanded due to change in any one determinants of demand is called elasticity of demand. The law of demand shows the direction of change in the demand with the change in price. But this law does not explain what percentage change in the price leads to a percentage change in the demand.
Symbolically,
E = percentage change in quantity demanded ÷ percentage change in any one determinant
Types of Elasticity of Demand are:
i. Price elasticity of demand
ii. Income elasticity of demand
iii. Cross elasticity of demand (Price of related goods)
Price Elasticity of Demand: A measurement of responsiveness of quantity demanded due to the change in the price of the commodity is called Price elasticity of demand.
According to Ferguson, “Price elasticity is the proportionate change in demand divided by the proportionate change in price.
i.e.
Ep or ep = Percentage change in Quantity demanded ÷ Percentage change in Price
OR % ∆Qd/∆P
Income Elasticity of Demand: A measurement of responsiveness of quantity demanded due to a change in income of the commodity is called income elasticity of demand. It is connected with normal goods and inferior goods.
i.e. Ey or ey = Percentage change in Quantity demanded ÷ Percentage change in income
OR, %∆Qd ÷∆y
Cross Elasticity of Demand: A measurement of responsiveness of quantity demanded of ‘x’ goods due to change in the price of ‘y’ goods is called cross elasticity of demand. It is connected with substitute and complement goods.
i.e. Ec = % ∆Qd of ‘x’ goods/ % ∆p of ‘y’ goods
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