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Demand elasticity measures how responsive a good's demand is to changes in other economic factors, such as price and income. It demonstrates how much a good reaction was required in terms of quantity for a particular change in one of these factors.
Several types of demand elasticity exist, including cross elasticity of demand, income elasticity of demand, and price elasticity of demand (PED) (CED). There are distinct formulas and interpretations for each category.
The most typical type is called price elasticity of demand, and it assesses how much the amount wanted alters as the price does. The formula for PED is:
PED = (% change in quantity demanded) / (% change in price)
Depending on whether the good is superior or inferior, PED might have a positive or negative value. A typical good is one that people purchase more of as their income rises, whereas a substandard item is one that they purchase less of as their income rises.
A further five categories for the value of PED are perfectly elastic, elastic, unitary elastic, inelastic, and perfectly inelastic. These groups show how responsive the market is to price adjustments.
Any price change will result in an infinite change in the quantity sought, which is the definition of completely elastic demand. This suggests that consumers are extremely susceptible to price fluctuations and will switch to other products if the price even slightly rises.
A changing price will result in a proportionately bigger change in the quantity required if the demand is elastic. This suggests that consumers are somewhat sensitive to price fluctuations and will drastically cut their usage if the price goes up.
A unitary elastic demand is one in which a change in price results in a corresponding change in the quantity required. This suggests that consumers are only slightly sensitive to price changes and will change their consumption in response to those changes.
When demand is inelastic, a change in price results in a proportionately lower change in the quantity desired. This suggests that consumers are not particularly sensitive to price fluctuations and will continue to consume relatively unaffected by price rises.
When demand is completely inelastic, no amount will change regardless of price. This suggests that consumers have no price sensitivity at all and will consume the same amount regardless of the price.
