Elasticity is the ratio of the percentage change in quantity. There are three types of elasticity of demand (perfectly inelastic, inelastic and elastic) demand curves.

If the quantity demanded remains constant when the price changes, then the elasticity of demand is zero and demand is said to be perfectly inelastic. On other hand if the percentage of quantity demanded is less then the percentage change in price, then the magnitude of the elasticity of demand is between zero and one and demand is said to be inelastic. Where as if the change of quantity demanded exceeds the percentage change in price, then the magnitude of elasticity is greater then 1 then demand will be elastic.

Elasticity of demand is usually influenced by three crucial factors and these main factors are:

· The proportion of income spent on the good

· The time elapsed since a price change

The closer the substitutes for a good or services, the more elastic is the demand for it. For example, hous

Elasticity of demand could be measured by three different way as you would see in (figures1.1 and 1.2).

= %AQ/ave

ing has few real substitutes (sleeping on a friend’s floor, in a hostel or on the street). As result, the demand for housing is inelastic. In contrast, metals have good substitute such as plastics and car travel has in public transport, so the demand of these goods is elastic.

Time is the last crucial factor, as the greater the time lapse since a price change, the more elastic is demand. When a price changes, consumers often continue to buy similar quantities of a good for a while. But given enough time, they find acceptable and less costly substitute. As this process of substitution occurs, the quantity purchased of an item that has become more expensive gradually declines.

Cross price elasticity of demand would very useful to firms which are producing wine, as in this case Italian wine.

Also in catris paribus, the higher proportion of income spent on a good, the more elastic is the demand for it. If only a small fraction of income is spent on a good, then a change in its price has little impact on the consumer’s overall budget. For example the proportion of income spent in food is higher in LDC’s then developed world which means food becomes less elastic the richer the country is.

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, D0 D2, Chinese Indian, D0 D1, elasticity demand, price elasticity, price elasticity demand, change price, percentage change, cross price, cross price elasticity, quantity demanded, demand oil, italian wine, elastic demand, income spent, demand italian wine, percentage change price, cross elasticity demand,