The three main types of elasticity of demand are discussed in brief.
1.Price elasticity of demand:
Definition and explanation:
The concept of price elasticity of demand is commonly used in economic literature. Price elasticity of demand is the degree of responsiveness of quantity demanded of a good to a change in its price. Precisely it is defined as:
“The ratio of proportionate change in the quantity demanded of a good caused by a given proportionate change in price”.
The formula for measuring price elasticity of demand is:
Price elasticity of Demand=
Let us suppose that price of a good falls from Tk. 10 per unit to Tk. 9 per unit in a day. The decline in price causes the quantity of the good demanded to increase from 125 units to 150 units per day. The price elasticity using the simplified formula will be:
Original quantity = 125
Original price = 10
Ed = -25/1*10/125 = -2
The elasticity coefficient is greater than one. Therefore, the demand for the good is elastic.