The concept of elasticity of demand measures the responsiveness of product demand to various factors. Price elasticity of demand focuses on how the quantity demanded changes in response to price changes. The cross-price elasticity of demand measures the impact of price changes in one good on the quantity demanded of another. It is positive for substitute goods and negative for complementary goods. Income elasticity of demand examines how changes in consumer income affect the quantity demanded, with positive elasticity for normal goods and negative elasticity for inferior goods.

The price elasticity of demand can be elastic or inelastic. Elastic demand occurs when the quantity demanded decreases more than the price increase, increasing total revenue. In contrast, inelastic demand refers to a situation where the quantity demanded decreases less than the price increase, leading to decreased total revenue. Several factors influence price elasticity, such as the availability of substitutes, whether a good is a necessity or luxury, the market definition, the time horizon, the proportion of income spent on the product, and brand loyalty.

The elasticity of supply measures the responsiveness of quantity supplied to price changes. Giffen goods, which are rare, have a positive own price elasticity of demand, meaning that as their price rises, the quantity demanded also increases. Factors affecting the elasticity of supply include production costs, capacity investment, the profitability of alternative products, weather conditions, technological advancements, the productivity of workers, and the number of firms in the market.

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Elasticity Explained

• The elasticity of demand measures how responsive the demand for a product is to changes in the factors affecting demand.
• Price (own) Elasticity of demand measures how much the quantity demanded changes, relative to a change in price.
• The cross-price elasticity of demand measures how the quantity demand of one good changes as the price of another.
• Cross price elasticity of demand is positive for substitute goods and negative for complementary goods.
• Income elasticity of demand measures how the quantity demanded changes as the consumer income change.