Types

• Most introductory economics courses and textbooks, such as "Principles of Economics" by Harvard economist Gregory Mankiw, identify three types of demand elasticity: price elasticity, income elasticity and cross-price elasticity. Of the three, price elasticity of demand receives the most attention in college economics courses.
  
  

Price Elasticity of Demand

• Price elasticity measures how much the level of demand for a good or service shifts in response to a change in price. Demand for a product is elastic if the quantity demand changes substantially in response to a change in price and inelastic if demand shows little or no change. For example, if higher beef prices result in lower demand for steaks and hamburgers, demand for beef is elastic. Factors that determine the elasticity of a good include whether it is a necessity or a luxury and whether substitute goods exist. Demand for goods that are considered necessities is less elastic. Demand is more elastic if the good in question has a close substitute. For example, an increase in beef prices may lower demand as consumers switch from beef to chicken or pork.
  
  

Income Elasticity of Demand

• Changes in incomes affect demand for goods and services. A pay raise, for example, gives a person additional disposable income, which may be spent on additional products. Income elasticity of demand measures how the quantity demanded changes as consumer income rises or falls. In most cases, higher income raises demand for most goods. Mankiw, however, points out that for some products or services, known as inferior goods, higher income may lower demand. He cites rides on city buses as an example of an inferior good.
  
  

Cross-Price Elasticity of Demand

• Cross-price elasticity compares two goods by measuring how the demand for one good changes in response to a higher or lower price for another good. The level of elasticity depends on whether the two goods in question are substitutes or complements. Mankiw cites hot dogs and hamburgers as examples of substitutes, noting that an increase in prices for one product may raise demand for another, as consumers shift their preferences to the lower-priced meat. Examples of complementary goods include computers and software because the two are used together. An increase in computer prices may lower demand for computer games, office applications, antivirus programs and other types of software.