Types of Demand Elasticity in Managerial Economics

MANAGERIAL
ECONOMICS

Table of Contents
QUESTION 1...................................................................................................................................1
Introduction.................................................................................................................................1
Different types of demand elasticity...........................................................................................1
QUESTION 2...................................................................................................................................2
QUESTION 3...................................................................................................................................3
QUESTION 4...................................................................................................................................4
QUESTION 5...................................................................................................................................5
QUESTION 6...................................................................................................................................7
QUESTION 7...................................................................................................................................8
(a)................................................................................................................................................8
(B)...............................................................................................................................................9
REFERENCES..............................................................................................................................11
.......................................................................................................................................................11

QUESTION 1
Introduction
Demand of a commodity is sensitive towards the economic variables. This sensitivity and
responsiveness is calculated by elasticity. Elasticity of demand measures the change in price of a
commodity and quantity demanded of that commodity. There are various types of demand
elasticity which is associated to the economic variables of price, income and advertisement.
Different types of demand elasticity
Price elasticity of demand – In this type of elasticity, demand sensitivity against price of a
product is measured. This elasticity is measured by comparing the proportionate change in
quantity demand and price (Černohous, 2017). There total of five price elasticity of demand
which are perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, unitary
elastic demand. The formula of calculating price elasticity is:
Ep = proportionate change in quantity demanded / proportionate change in price
Or, Ep = ΔQ / ΔP * P / Q
Income elasticity of demand – Under this situation, the effect of income change of consumer
is measured on the quantity demanded of a commodity. This elasticity represents the degree of
responsiveness of a demand over change in consumer’s income. This elasticity can be calculated
using below formula:
Ey = Percentage change in demanded quantity / percentage change in consumer’s income
Cross elasticity of demand – This concept refers to the change in quantity demanded of a
product due to the change in price of another product. This situation is result of inter related
goods which are either consumed together or have a substitutional relationship. The cross
elasticity of demand can be calculated using the following formula:
Ec = proportionate change in quantity demanded of product X / proportionate change in
price of product Y.
In order to apply this situation, it is important for the two products to be complementary or
substitutional so that one product can affect other product.
Advertising elasticity of demand – This elasticity refers to the change in quantity demanded
of a product due to the advertisement of that product. This responsiveness can be calculated
1