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Elasticity of Demand – Concept & Types (PED, YED, XED)

Knowing only direction of change (law of demand) is not enough for business decisions. Managers also want to know how much demand will change when price or income changes. This is explained by elasticity of demand.

1. Meaning of Elasticity of Demand

Elasticity of demand measures the responsiveness of quantity demanded to a change in its determinants (price, income, price of related goods), other things remaining constant.

If a small change in price causes a large change in quantity demanded → demand is elastic.
If even a big change in price causes little change in quantity demanded → demand is inelastic.

Key Concept
Elasticity of demand = degree of responsiveness of quantity demanded due to change in price, income or price of related goods.

2. Types of Elasticity of Demand

The three main types relevant for BCom are:

  1. Price Elasticity of Demand (PED)
  2. Income Elasticity of Demand (YED)
  3. Cross Elasticity of Demand (XED)

3. Price Elasticity of Demand (PED)

Price Elasticity of Demand measures the percentage change in quantity demanded due to a given percentage change in price, other things remaining constant.

Symbolically:

Ep = % change in Qd / % change in Price

Degree of Price Elasticity (just concept here):

  • Ep > 1 – Elastic demand
  • Ep = 1 – Unitary elastic
  • Ep < 1 – Inelastic demand

Examples:

  • Luxury goods, branded items → usually more elastic.
  • Necessities (salt, kerosene) → usually inelastic.

4. Income Elasticity of Demand (YED)

Income Elasticity of Demand measures the percentage change in quantity demanded due to a given percentage change in income of the consumer.

Symbolically:

Ey = % change in Qd / % change in Income

Types:

  • Positive income elasticity (normal goods): income ↑ → demand ↑.
  • Negative income elasticity (inferior goods): income ↑ → demand ↓.
  • Zero income elasticity: demand does not change with income (e.g., salt).

5. Cross Elasticity of Demand (XED)

Cross Elasticity of Demand measures the percentage change in quantity demanded of one good due to a given percentage change in price of another related good.

Symbolically:

Exy = % change in Qdx / % change in Py

Where:

  • Qdx = Quantity demanded of good X
  • Py = Price of good Y (related good)

Types:

  • Positive cross elasticity: for substitutes (tea & coffee).
    • Price of tea ↑ → demand for coffee ↑ → Exy > 0.
  • Negative cross elasticity: for complements (car & petrol).
    • Price of petrol ↑ → demand for cars ↓ → Exy < 0.
  • Zero cross elasticity: unrelated goods.

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6. Importance of Elasticity Concept (Preview)

Elasticity is very important for:

  • Pricing decisions (whether to increase or decrease price)
  • Tax policy (indirect taxes on inelastic goods)
  • Output and production planning

This is discussed in detail in later lessons.

7. Quick Revision Points

  • Elasticity = responsiveness of demand.
  • PED: change in demand due to change in price.
  • YED: change in demand due to change in income.
  • XED: change in demand due to change in price of related goods.
  • Signs: YED (+ normal, - inferior), XED (+ substitutes, - complements).

8. Quiz Time 🎯

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