Elasticity of Demand refers to the degree of responsiveness of quantity demanded to the changes in the determinants of demand i.e. price of the good, consumer income and price of related goods. There are three quantifiable determinants of demand and hence elasticity of demand can be of three types; * Price Elasticity of Demand
Price Elasticity of demand is the degree of responsiveness of demand to a change in its price. In technical terms it is the ratio of the percentage change in demand to the percentage change in price. There are a number of factors that determine the price elasticity of demand. * If close substitutes are available then there is a tendency for customers to shift from one product to another when the price increases and demand is said to be elastic. For example, demand for two brands of tea. If the price of one brand, say Brand 1, increases then the demand for the other brand, say brand B increases. In other words greater the possibility of substitution greater the elasticity. * The amount of income spent by the customer on a commodity plays a great role in determining the price elasticity. The elasticity of the commodity will be more when the proportion of income spent on it is more. * The usefulness of the commodity is an important factor in determining the elasticity. If the commodity can be put to many uses then the elasticity will be greater. * If two commodities are consumed jointly i.e. complements, then increase in the price of one will reduce the demand for both. * Time plays a very important role in determining the elasticity of demand. Demand is more elastic if time involved is long. In the short run, it is difficult to substitute one commodity for another. * Cost of switching between different products and services is another factor. There may be significant transaction costs involved