Different Types of Cross Elasticity of Demand

DIFFERENT TYPES OF CROSS ELASTICITY OF DEMAND

A. CROSS ELASTICITY OF SUBSTITUTES : In case of substitutes, as the price of one good increases the demand for the other good also increase at the same time.

i.Relatively elastic: Where a small change in price of good A causes a large change in quantity demanded of good B. The elasticity o f substitutes is greater than unity [E >1].This is explained with the help of a diagram.

X axis -quantity demanded of B

Y axis -price of A

DD -demand curve

Explanation: The figure shows that there is a small increase in price of good A from a to a1, but it has resulted in a large increase in quantity demanded of B from b to b1. It is also known as relatively elastic demand.

ii. Relatively inelastic demand: W here a large change in price of good A causes a small change in quantity demanded of good B. The elasticity of substitutes is lesser than unity [E <1]. This is explained with the help of a diagram.

X axis -quantity demanded of good B

Y axis -price of good A

DD- demand curve

Explanation: The figure shows that there is a large increase in price o f good A from a to a1, but it has resulted in only a small increase in quantity demanded of good B from b to b1. It is also known as relatively in elastic demand.

iii.Unitary elastic: Here a given proportionate change in price causes an equally proportionate change in quantity demand. This is explained with the help of a diagram.

X axis-quantity demanded of good B

Y axis- price of good A

DD- demand curve

Explanation: Price elasticity of demand is unity when the change in demand is exactly proportionate to the change in price. [E=1].

iv.Perfectly in elastic demand: Here a large change in price causes no change in quantity demanded. It is zero elastic de mand [E=0]. This is explained with the help of a diagram.

X axis-quantity demanded of good B.

Y axis- price of good A.

DD- demand curve

Explanation: The figure sho ws that even if the price increases from a to a1 there is no change in the quantity demand . This happens in case of necessities like salt .

v. Unrelated goods: If two goods are not at all related then they have negative elasticity of demand. This is explained wit h the help of a diagram.

X axis -quantity demanded of good B.

Y axis -Price of good A.

DD- demand curve

Explanation: The figure shows that in case on unrelated goods if the price of good A increase from a to a1, then the demand for good B will decrease from b to b1.

B. CROSS ELASTICITY OF COMPLIMENTARY GOODS: In case of complimentary goods, as the price of o ne good increases the demand for the other good decreases at the same time.

i.Perfectly elas tic demand: W here no reductio n in price is needed to cause an increase in quantity demanded. This is explained with the help of a diagram.

X axis-quantity demanded of good B

Y axis- price of good A

DD- demand curve

Explanation: Price elasticity o f demand is infinity when a small change or no change in price of good A leads to an infinitely large change in the amount demanded of good B. It is perfectly elastic demand. [E=?]

ii. Perfectly in elastic demand: Here a large change in price of good B causes no c hange in quantity demanded o f good B. It is zero elastic demand [E=0]. This is explained with the help of a diagram.

X axis-quantity demanded of good B

Y axis- price of good A

DD- demand curve

Explanation: The figure shows that even if the price of good B decreases from a to a1 there is no change in the quantity demand of good A. This happens in case of necessities like salt.

iii.Unitary elastic: W here a given proportionate change in price causes an equally proportionate change in quantity demand. This is explained with the help of a diagram.

X axis-quantity demanded of good B

Y axis- price of good A

DD- demand curve

Explanation: Price elasticity of demand is unity when the change in demand is exactly proportionate to the change in price. [E=1].

iv. Relative ly elastic: Where a small change in price of good B causes a more than proportionate change in quantity demanded of good A. The price elasticity of demand is greater than unity [E >1].This is explained with the help of a diagram.

X axis -quantity demanded of good B

Y axis -price of good A

DD -demand curve

Explanation: The figure shows that there is a small decrease in price fro m a to a1, but it has resulted in a large increase in quantity demanded from b to b1. It is also known as relatively elastic demand.

v. Relatively inelastic demand: W here a change in price causes a less than proportionate change in quantity d emanded. The price elasticity of demand is lesser than unity [E <1]. This is explained with the help of a diagram.

X axis -quantity demanded of good B

Y axis -price of good A

DD- demand curve

Explanation: The figure shows that there is a large decrease in price fro m a to a1, but it has resulted in only a small increase in quantity demanded from b to b1. It is also known as relatively elastic demand.