Elasticity of demand refers to sensitivity of demand to price change. Mathematically it is the ratio of % change in quantity demanded to % change in the commodity's price. There are, generally, 5 types of elasticity of demand:
- Elastic: refers to a situation when slight change in price may affect the demand significantly.
- Inelastic: a situation where change in price will have relatively little effect on demand
- Perfectly Elastic: situation where a small change in price can change the demand to 0 or infinity. In a perfectly elastic demand scenario, small increase in price causes demand to fall to 0, while a small fall in price will cause the demand to go to infinity.
- Perfectly inelastic: In a perfectly inelastic scenario, no change in price level will bring any change in demand. In other words, whatever maybe the price, quantity demanded will always be the same.
- Unit elasticity: A unit change in price will cause a unit change in demand. or example, a 2% price increase will result in 2 % decrease in demand.