Unit-2 Laws of Demand and Elasticity of Demand POE | BBA First Year

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Definition Laws of demand, elasticity of demand

• Elasticity of demand is an economic term. This refers to demand sensitivity. In other words, it helps to understand how demand for a good changes when other economic variables change. These economic variables include factors such as prices and consumer income.       
• Demand elasticity is calculated by dividing the percentage change in quantity demanded by the percentage change in some other economic variable. A higher value for demand elasticity with respect to an economic variable means that consumers are more sensitive to changes in this variable.
  

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Types Of Demand Elasticity  

• Let’s take a look at the types of demand elasticity. There are broadly three types of demand elasticity.

 Price elasticity of demand     

•  It refers to the change or sensitivity of customer demand for the quantity of a good in relation to changes in its price. Companies often collect this data on consumer reaction to price changes. This helps them adjust the price to earn maximum profits.

  Income elasticity of demand 

•  It is the response of demand for a product in relation to changes in income. Therefore this will help in measuring the increase or decrease in demand when the income of the consumer increases or decreases.

 Cross elasticity of demand   

• This price is calculated by using the percentage change in the quantity demanded of a good and dividing it by the percentage change in the price of another good. Furthermore, it indicates the response of the consumer to demand a particular commodity according to the price changes of other commodities.
• Demand elasticity is usually measured in absolute terms. This means that the sign of the variable is ignored. If the value is greater than 1, it is elastic. Furthermore, it implies that demand is responsive to economic changes (such as price). If the value is less than 1 then it is inelastic.·        
• This means that demand does not appear to change in response to economic changes such as price. Demand is unit elastic when its value is equal to 1. This means that the value of demand brings about economic changes. proportionally with economy change.

Law Of Demand

• Economists use the term demand to refer to the quantity of a good or service that consumers want and have the ability to purchase at a price. Demand is based on needs and ability to pay. Ability to pay is important because in its absence demand becomes ineffective.
• The law of demand states that if all other factors remain constant, the price and quantity demanded of any good or service are inversely related to each other. This means that if the price of a commodity increases, its corresponding demand decreases. Similarly, if the price of a good decreases then its demand should increase accordingly.

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