Meaning of Elasticity of Demand:

Just as a piece of rubber can be stretched and shrunk by applying external force, so it is elastic. Similarly, the quantity demanded of a good can also be increased or decreased by its determinants.

Therefore, the demand for a good is also elastic. There are various determinants of the demand for a good. The number of types of demand elasticity is equal to the number of determinants that can be given numerical values.

Here, among the determinants of the demand for a good, the price of the good, the income of the consumer consuming the good, and the price of related goods (complementary goods or substitute goods) are taken as major factors, and the elasticity of demand is discussed based on these factors.

Thus, the change in demand that occurs due to a change in the value of any one of the factors that determine demand, such as the price of the good, the income of the consumer, and the price of related goods, can be called the elasticity of demand.

Types of Elasticity of Demand:

Based on the factors that determine demand, the elasticity of demand is divided into three parts: price elasticity of demand, income elasticity of demand, and cross elasticity of demand. These are explained below:

(a) Price Elasticity of Demand: 

The law of demand states that, other things remaining equal, the demand for a good increases when its price falls and decreases when its price rises. 

However, the law of demand does not tell us by how much quantity or rate the demand increases or decreases when the price falls or rises by a certain amount or rate. For this, price elasticity of demand is necessary.

Thus, the price elasticity of demand is the percentage change in the quantity demanded of a good due to a one percent change in its price. In other words, the price elasticity of demand is the percentage change in the quantity demanded of a good due to a certain percentage change in its price.

When discussing the price elasticity of demand, it is assumed that other things, such as consumer income, habits, tastes, preferences, and the prices of other related goods, do not change, i.e., these factors remain constant.

Thus, the price elasticity of demand coefficient is obtained by dividing the percentage change in the quantity demanded of a good by the percentage change in the price of that good. It can be calculated as follows:

Price Elasticity of Demand Coefficient = (Percentage Change in Quantity Demanded of the Good) / (Percentage Change in Price of the Good)

or,

Example: Suppose that when the price of a good changes by 50 percent, its demand changes by 75 percent. Then, the price elasticity of demand coefficient of that good can be obtained as follows:

Price Elasticity of Demand Coefficient = (Percentage Change in Quantity Demanded of the Good) / (Percentage Change in Price of the Good)

Price Elasticity of Demand Coefficient = 75% / 50% = 1.5

Here, the price elasticity of demand coefficient is 1.5. This tells us that a one percent change in the price of a good leads to a 1.5 percent change in the quantity demanded of that good.

(b) Income Elasticity of Demand: 

The demand for a good is not only affected by its price but also by the income of the consumer. Income elasticity of demand is the percentage change in the quantity demanded of a good due to a one percent change in the consumer's income. 

In other words, income elasticity of demand is the percentage change in the quantity demanded of a good due to a certain percentage change in the consumer's income. 

When discussing income elasticity of demand, it is assumed that other things, such as the price of the good demanded by the consumer, the prices of other related goods, and the consumer's habits, tastes, preferences, etc., do not change, i.e., these factors remain constant.

Thus, the income elasticity of demand coefficient is obtained by dividing the percentage change in the quantity demanded of a good by the percentage change in the consumer's income. It can be calculated as follows:

Income Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Income)

or,

Example: Suppose that when a consumer's income changes by 30 percent, the demand for the good they consume changes by 50 percent. Then, the income elasticity of demand coefficient can be obtained as follows:

Income Elasticity of Demand Coefficient = (Percentage Change in Quantity Demanded) / (Percentage Change in Income)

Income Elasticity of Demand Coefficient = 50% / 30% = 1.67

Here, the income elasticity of demand coefficient is 1.67. This tells us that a one percent change in the consumer's income leads to a 1.67 percent change in the quantity demanded of that good.

(c) Cross Elasticity of Demand: 

The demand for a good is not only affected by the consumer's income and the price of that good but also by the price of related goods. A related good of a particular good refers to its substitute good or complementary good. 

Substitute goods are goods that can be used in place of each other, such as coffee and tea, sugar and jaggery. 

Complementary goods are goods that are consumed or used together, such as tea and sugar, pens and ink, motorcycles and petrol. 

A change in the price of one of two substitute goods leads to a change in the demand for the other good in the same direction. 

However, a change in the price of one of two complementary goods leads to a change in the demand for the other good in the opposite direction.

Cross elasticity of demand is the percentage change in the quantity demanded of one good due to a one percent change in the price of another related good. 

In other words, cross elasticity of demand is the percentage change in the quantity demanded of one good due to a certain percentage change in the price of another related good. 

When discussing cross elasticity of demand, it is assumed that other things, such as consumer income, habits, tastes, preferences, and the price of the good being demanded, do not change, i.e., these factors remain constant.

Thus, the cross elasticity of demand coefficient is obtained by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of another good. It can be calculated as follows:

Cross Elasticity of Demand Coefficient = (Percentage Change in Quantity Demanded of Good 'A') / (Percentage Change in Price of Good 'B')

or,

Example: If a 60 percent change in the price of good 'B' leads to an 80 percent change in the demand for good 'A', then the cross elasticity of demand coefficient can be obtained as follows:

Cross Elasticity of Demand Coefficient = (Percentage Change in Quantity Demanded of Good 'A') / (Percentage Change in Price of Good 'B')

Cross Elasticity of Demand Coefficient = 80% / 60% = 1.33

Here, the cross elasticity of demand coefficient is 1.33. This tells us that a one percent change in the price of good 'B' leads to a 1.33 percent change in the demand for good 'A'.

Meaning of Price Elasticity of Supply:

The law of supply states that, other things remaining equal, the supply of a good decreases when its price falls and increases when its price rises. However, the law of supply does not tell us by how much quantity or rate the supply increases or decreases when the price falls or rises by a certain amount or rate. For this, price elasticity of supply is necessary.

Thus, the price elasticity of supply is the percentage change in the quantity supplied of a good due to a one percent change in its price. In other words, the price elasticity of supply is the percentage change in the quantity supplied of a good due to a certain percentage change in its price. 

When discussing the price elasticity of supply, it is assumed that other things, such as the cost of production of the good, the state of production technology, the prices of the resources used in production, weather and climate conditions, as well as the number of producers, etc., do not change, i.e., these factors remain constant.

Thus, the price elasticity of supply coefficient is obtained by dividing the percentage change in the quantity supplied of a good by the percentage change in the price of that good. It can be calculated as follows:

Price Elasticity of Supply Coefficient = (Percentage Change in Quantity Supplied of the Good) / (Percentage Change in Price of the Good)

or,

Example: Suppose that when the price of a good changes by 40 percent, its supply changes by 52 percent. Then, the price elasticity of supply coefficient of that good can be obtained as follows:

Price Elasticity of Supply Coefficient = (Percentage Change in Quantity Supplied of the Good) / (Percentage Change in Price of the Good)

Price Elasticity of Supply Coefficient = 52% / 40% = 1.3

Here, the price elasticity of supply coefficient is 1.3. This tells us that a one percent change in the price of a good leads to a 1.3 percent change in the quantity supplied of that good.