Elasticity of Demand

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!

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Elasticity of Demand

by Brian Coil

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