4. What is Elasticity?
Changes in price may or may not affect the demand or
supply of any good or service.
5. Price Elasticity of Demand
Measure of how much the quantity demanded of a good
responds to a change in the price of that good.
Percentage change in quantity demanded divided by the
percentage change in price.
6. Ranges of Elasticity
Inelastic Demand
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one.
Elastic Demand
Quantity demanded responds strongly to changes in price.
Price elasticity of demand is greater than one.
In business and economics, elasticity refers the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes.
Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high.
Elasticity is a measure of a variable's sensitivity to a change in another variable.
HOW IT WORKS (EXAMPLE):
Price elasticity of demand, also known simply as "price elasticity," is more specific to price changes than the general term known as "elasticity of demand."
The formula for price elasticity is:
Price Elasticity = (% Change in Quantity) / (% Change in Price)
Let's look at an example. Assume that when gas prices increase by 50%, gas purchases fall by 25%. Using the formula above, we can calculate that the price elasticity of gasoline is:
Price Elasticity = (-25%) / (50%) = -0.50
Measure of the responsiveness of the quantity demanded of a good or service to a change in its price for a good or service.
Example of relatively inelastic demand is that for gasoline. As the price of gasoline increases, the quantity demanded doesn't decrease all that much. This is because there are very few good substitutes for gasoline and consumers are still willing to buy it even at relatively high prices.
