Elasticity of Demand

Economy

Quick Definition

Elasticity of Demand measures how much the quantity demanded of a good or service changes in response to a change in its price or other factors.

Detailed Explanation

Elasticity of Demand is an important concept in economics that helps understand how sensitive consumers are to changes in price, income, or other factors. The most common type is Price Elasticity of Demand (PED).

The formula is:
Elasticity of Demand = % Change in Quantity Demanded ÷ % Change in Price

Types of elasticity:

  • Elastic Demand (>1): Demand changes significantly with price changes
  • Inelastic Demand (<1): Demand changes very little with price changes
  • Unitary Elastic (=1): Demand changes proportionally with price

Factors affecting elasticity include:

  • Availability of substitutes
  • Necessity vs luxury nature of goods
  • Consumer income
  • Time period

Understanding elasticity helps businesses set pricing strategies and helps governments in policy-making and taxation decisions.

Example

"<p> If the price of a product increases by 10% and demand falls by 20%, the elasticity is:<br> <strong>20 ÷ 10 = 2 (Elastic Demand)</strong> </p>"

← Back to Financial Dictionary