Lesson 5, Topic 4
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Elasticity of Demand

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Elasticity of demand shows how demand responds to changes in price. Elasticity of demand measures the degree of responsiveness of the quantity of a commodity brought about by small changes in the price of a commodity or by changes of the price of other commodities. It measures the extent to which the quantity of a commodity demanded by consumer changes as a result of changes in the price of the commodity, income, etc.

In summary elasticity of demand can be defined as the degree of responsiveness of demand to changes in price, income, and prices of other commodities.

Types of Elasticity of Demand

1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Price elasticity of demand: this is the degree of responsiveness of demand to a small changes in price of the commodity.

The formula for calculating price elasticity of demand

Ed = $$\frac{ \% \; change \; (\Delta) \; in \; quantity \; demanded}{\% \; change \; (\Delta) \; in \; price} \\ \scriptsize i.e \; \normalsize \frac{ \% \; change \; (\Delta) \; qd}{ (\Delta) \; in \; price}$$

Where $$\scriptsize \Delta \; qd = \normalsize \frac{qd_2 \; – \; qd_1}{qd_1} \\ = \frac{new \; qty \; – \; old \; qty}{old \; qty} \\ \scriptsize \Delta \; p = \normalsize \frac{p_2\; – \; p_1}{p_1} \\ \scriptsize i.e \; \normalsize \frac{new \; price \; – \; old \; pricce}{ old \; pricce}$$

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