Elasticity of Demand Quiz

Elasticity of Demand: Definition, Types, Methods of Measurement, and Factors Affecting It

• Elasticity of demand measures the degree of responsiveness of the quantity demanded of a good or service to changes in its price, income, or the price of related goods or services.
• There are three types of elasticity of demand: Price Elasticity of Demand (PED), Income Elasticity of Demand (YED), and Cross Elasticity of Demand (XED).
• PED measures the responsiveness of the quantity demanded of a product to a change in its price and is classified into five types based on the degree of responsiveness.
• The five types of PED are perfectly elastic demand, perfectly inelastic demand, unitary elastic demand, relatively elastic demand, and relatively inelastic demand.
• There are three methods of measuring PED: total revenue method, point method, and arc method.
• The total revenue method calculates PED by comparing the total revenue before and after a change in price.
• The point method calculates PED at a particular point on the demand curve, while the arc method calculates PED over a range of prices.
• Factors affecting PED include the availability of substitutes, the proportion of income spent on the product, the time period, brand loyalty, and the nature of the product.
• If there are many substitutes for a product, the demand is likely to be more elastic.
• If a product takes up a large proportion of a consumer's income, the demand is likely to be more elastic.
• In the short run, the demand is likely to be inelastic, while in the long run, the demand is likely to be more elastic.
• PED is important for businesses as it helps them to make pricing decisions, and for government policy as it helps to determine the impact of taxes on consumer behavior.