Question

what is price elasticity of demand? what do you understand by that? how many types of elasticity are there? explain elaborately with example

Answer 1

Economists use price elasticity to understand how supply or demand changes to understand the workings of the real economy , given price changes. For example, certain goods are rather inelastic, that is, their prices don't change much given changes in supply or demand, for example people need to buy fuel to get to work or fly around the world, and even if oil prices increase, people are likely to purchase exactly the same amount of gas still. On the other hand, other commodities are very dynamic, causing significant changes in their demand or supply due to their price changes.

There are four types of elasticity

Price demand elasticity (PED), which tests the reactivity of the quantity demanded to a price change. PED can be measured over a price range, called arc elasticity, or at a certain point, called point elasticity;

Price Elasticity of Supply (PES), which measures the reactivity of the quantity supplied to a price change.

Cross elasticity of demand (XED), which measures the quantity responsiveness demanded of one good , good X, to a price change of another good , good Y.

Income elasticity of demand (YED), which measures the responsiveness of quantity required for a change in consumer income.