Elasticity of Demand: Class-12

Elasticity of Demand: Class-12

Heading out to shop, you might see certain cost shifts really sway what you grab, whereas others don’t shift your choices much at all. Take salt - its price jumps usually don't stop folks from tossing it in the cart; however, when sweets or cinema seats get pricier, plenty start thinking twice before buying.

This variation in how much we buy when prices shift - that’s what experts name Demand Elasticity.

Simply put, elasticity shows how much buyers react when prices shift, their pay changes, or similar items cost more or less.

What Is Elasticity of Demand?

Elasticity of demand shows how much the amount people want to buy shifts when one thing changes - like price or income. Instead of staying flat, that number jumps or drops depending on what's tweaked up top

Cost of the item

Earnings from what people make

Cost of similar items

When folks shift what they buy quickly because of a price tweak, that’s elastic demand. But if people barely budge even when prices jump or drop, it’s called inelastic.

Types of Elasticity of Demand

1. Price Elasticity of Demand (PED)

This kind stays popular - it reveals the shift in demand as prices go up or down. While price moves one way, buying interest often reacts the opposite.

Formula:

How much demand shifts when price changes divided by how much the price itself goes up or down

If prices shift just a bit but people buy way more or less, that’s elastic demand.

If a huge price shift hardly moves demand, then that’s called inelastic.

Examples:

Petrol: demand stays steady, even when prices shift - folks rely on it no matter what.

Ice cream: stretchy demand, since folks might just eat less when prices rise.

2. Income Elasticity of Demand (YED)

This reveals the shift in buying habits as people earn more or less.

Types:

Demand goes up as earnings go higher - that’s normal stuff.

Demand drops as earnings go up - typical for lower-tier products. When people earn more, they tend to switch away from these items.

Example:

Instant noodles could count as something people buy less when they earn more, whereas name-brand clothes usually see demand go up along with income.

3. Cross Elasticity of Demand (XED)

This shows how buying one item shifts when the cost of a linked product goes up or down.

Types:

When tea costs more, people often buy coffee instead - shows how one product can swap for another when prices shift.

Negative cross elasticity: Complementary goods (car and petrol).

Why Elasticity of Demand Is Important?

1. Helps Businesses Set Prices

Firms should understand what people do when prices shift. When demand stretches easily, a higher cost could slash purchases big time. But if it barely budges, companies may lift prices while keeping most buyers on board.

2. Guides Government Policy

Governments check how flexible prices are when setting taxes. When people keep buying something no matter the price - say fuel or smokes - it usually gets hit with higher levies since sales don’t drop.

3. Helps in Making Economic Predictions

Elasticity makes it easier to see how buyers act, figure out income trends, or predict what markets might do next.

Factors Affecting Elasticity of Demand

1. Availability of Substitutes

When there are more alternatives, demand gets more flexible.

Fewer options lead to less flexibility.

2. Nature of the Good

Necessities are inelastic.

Luxuries are elastic.

3. Share in Income

Few items people spend a lot on - say, gadgets - are usually sensitive to price shifts.

4. Time Period

People adjust slowly.

Demand tends to stretch further over time.

Conclusion

Elasticity of demand? That’s not only some textbook idea - actually pops up around us all the time, even if we don’t notice. Because of it, we can figure out why certain price hikes really sting while others slip right past us. Whether companies are setting prices or officials are shaping rules, this thing quietly shapes how markets move. Instead of ignoring small shifts, people react differently - and that reaction drives outcomes everywhere.