Elasticity of Demand: Elasticity of demand is a measure of the responsiveness of quantity demanded to changes in price or income. It indicates how sensitive the quantity demanded is to changes in these factors. The concept of elasticity helps in understanding the degree of responsiveness of demand and its impact on consumer behavior and market outcomes.

There are different types of elasticity of demand, including price elasticity of demand, income elasticity of demand, and cross-price elasticity of demand.

1. Price Elasticity of Demand: Price elasticity of demand measures the responsiveness of quantity demanded to changes in the price of a product. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

The formula for price elasticity of demand (Ed) is: Ed = (% change in quantity demanded) / (% change in price)

The interpretation of price elasticity values is as follows:

• Ed > 1: Elastic demand. A percentage change in price leads to a greater percentage change in quantity demanded.
• Ed = 1: Unitary elastic demand. A percentage change in price leads to an equal percentage change in quantity demanded.
• Ed < 1: Inelastic demand. A percentage change in price leads to a smaller percentage change in quantity demanded.

2. Income Elasticity of Demand: Income elasticity of demand measures the responsiveness of quantity demanded to changes in consumer income. It indicates whether a good is a normal good or an inferior good and the degree of responsiveness to changes in income.

The formula for income elasticity of demand (Ey) is: Ey = (% change in quantity demanded) / (% change in income)

The interpretation of income elasticity values is as follows:

• Ey > 0: Normal good. A positive change in income leads to an increase in quantity demanded.
• Ey < 0: Inferior good. A positive change in income leads to a decrease in quantity demanded.

3. Cross-Price Elasticity of Demand: Cross-price elasticity of demand measures the responsiveness of quantity demanded of one good to changes in the price of another related good. It indicates whether the goods are substitutes or complements.

The formula for cross-price elasticity of demand (Exy) is: Exy = (% change in quantity demanded of Good X) / (% change in price of Good Y)

The interpretation of cross-price elasticity values is as follows:

• Exy > 0: Substitutes. An increase in the price of Good Y leads to an increase in the quantity demanded of Good X.
• Exy < 0: Complements. An increase in the price of Good Y leads to a decrease in the quantity demanded of Good X.

Arc Elasticity: Arc elasticity is a method of calculating elasticity when there is a change in both price and quantity demanded, using the average of the initial and final values. It is represented as the ratio of the percentage change in quantity to the percentage change in price between two points on a demand curve.

The formula for arc elasticity is: E = [(Q2 – Q1) / (Q1 + Q2) / 2] / [(P2 – P1) / (P1 + P2) / 2]

Arc elasticity is useful when the price and quantity changes are not small and when the direction of change matters (i.e., whether it is an increase or decrease).

By measuring elasticity of demand, economists and businesses can assess the sensitivity of demand to changes in price and income, understand consumer behavior, make pricing decisions, forecast demand, and develop effective marketing strategies.