Elasticity of Demand

by Brian Coil

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Economic Definitions

Economic Definitions

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Elasticity of DemandPresentation Transcript

• Elasticity of Demand What is it and how is it measured?
• Elasticity Defined
• Elasticity is defined by Amosweb.com as “The relative response of one variable to changes in another variable ”.
• For our Economics purposes, the definition further states that “ the price elasticity of demand, one of the more important applications of this concept in economics, is the percentage change in quantity demanded measured against the percentage change in price.”
• Thus, the two variables in question are:
• The quantity supplied
• Price
• Elasticity can take three forms:
• Elastic:
• When the quantity demanded is very sensitive to price
• Inelastic:
• When the quantity demanded is not very sensitive to price
• Unitary Elastic
• When the quantity demanded moves in lock-step with price change
• Elasticity is calculated as follows:
• 1. Calculate the percentage change in Price
• ((Initial Price – New Price) / Initial Price) * 100 = percentage (%) change of price
• 2. Calculate the percentage change in Quantity Demanded
• ((Initial Quantity – New Quantity) / Initial Quantity) * 100 = % change of supply
• 3. Calculate the Elasticity
• % change of Quantity / % change of Price = Elasticity
• What do the numbers mean?
• If the result of the Elasticity calculation is greater than 1, the relationship is said to be Elastic.
• If the result of the Elasticity calculation is less than 1, the relationship is said to be Inelastic.
• If the result of the Elasticity calculation is exactly 1, the relationship is said to be Unitary Elastic.
• Elastic Demand
• When Demand is Elastic, price has a large impact on the demand for a good.
• This is generally true for luxury items, such as Jewelry, as they are not required to exist.
• Examples Include:
• Jewelry
• Houses
• Cars
• Inelastic Demand
• Inelastic Demand indicates that price has very little impact on the demand for a good.
• This is generally true for essentials, such as Food, as they are required to exist.
• Examples Include:
• Food
• Clothing
• Utilities
• Unitary Elastic Demand
• Unitary Elastic Demand indicates that the percentage change in the price of the good will equal the percentage change in the demand for the good.
• Examples Include:
• Any good with an Elasticity of Demand Calculation equaling 1!