Definition of elasticity
Elasticity has been described as the degree of responsiveness of the quantity demanded relative to the factors that influence the quantity demanded. It is a ratio of relative change in quantity demanded and the relatives’ changes in factors that affects demand. The different types of elasticity of demand get their names from the factors that influence demand. These factors are prices of the commodity, changes in consumer’s income, changes in consumers taste and preference, changes in the prices of related products. The demand curve for normal goods will slope from left to right indicating that the curve has a negative gradient. The implication of these is that elasticity of demand for normal goods will always be negative. The extent of gradient or the steepness of slope is a very important economics measure of elasticity. When we consider the gradient as a measure of elasticity we have to consider only the absolute values of the slope. This way we are able to say that the value of the gradient is less than one, greater than one or equal to one. The three conditions give rise to the three major category of elasticity of demand measures.
The inelastic demand implies that the absolute value of the elasticity of demand is less than one. An inelastic demand therefore exists when a relative increase in price by one unit results in a proportionate decrease in quantity demanded by one unit. When the absolute value of the elasticity of demand is greater than one it indicate that one unit of increase in prices of a commodity will result to a decrease of more than one unit in the quantity demanded. This is an indicator than demand is greatly affected by price changes. When the absolute value of the elasticity of demand is equal to one or is unitary the demand is said to be unitary elastic. That is for each additional increase by unit in prices there is a decrease of one unit in the quantity demanded. There will be exception when the gradient is zero or positive but it is not of very significant importance to us in economics.
Inelastic, elastic and unitary demand will affect the total revenue differently when prices are reduced. Under inelastic demand reduction in prices results to a smaller increase in quantity demanded hence total revenue will reduce. Under the unitary demand total revenue will be unaffected by a reduction in prices.
The most common type of elasticity is the price elasticity. This type of elasticity is used as a measure of relative changes in quantity demand due to relative changes in commodity prices when all the other factors are held constant. The other types of elasticity of demand are income elasticity of demand and cross price elasticity of demand. Income elasticity of demand is a measure of the relative change in quantity demanded relative to the changes in consumer’s income. Normal goods under income elasticity are has a positive income elasticity while inferior goods will have a negative income elasticity. Cross price elasticity is a measure in relative changes of one commodity relative to another commodity.