Discussion Topic

# Understanding Elasticity of Demand and Its Calculation

Summary:

Elasticity of demand measures how the quantity demanded of a good responds to changes in price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. This concept helps in understanding consumer behavior and can influence pricing strategies in economics.

What is elasticity of demand?

Elasticity of demand is a demand relationship in which a any given percentage change in price will result in a larger percentage change in the quantity demanded. The more demand expands or contracts after a price change the greater the elasticity. For example, if a 'goods' has a close substitute such as chicken substituted for steak the steak is 'elastic'. If the price for steak goes up consumers can choose something else to satisfy their dinner meal. However to fully understand elasticity of demand an example of inelasticity of demand is needed. Milk is usually said to be inelastic because there is no close substitute. ( it is true there is powdered and condensed milk but these 'goods' are not powerful enough to affect demand for milk) If the price of a gallon of milk goes up consumers will still purchase the milk. Usually consumer reasoning boils down to a decision about luxury verses necessity.

Last Updated on

What is elasticity of demand?

As noted in the other answer, the elasticity of demand is a measure of how much the demand for a product changes when the price changes.

If the demand for a product is very ELASTIC, it will change alot as the price changes.  So, if the price drops, lots more people will buy it because the price is lower.  If the price rises, lots of people will decide not to buy because the price is too high.  As you can see, elastic demand is for products that people like but don't have to have.

If the demand for a product is very INELASTIC, it won't change much even if the price changes.  For example, if something is very unappealing because it is super ugly or very pricey to maintain, the demand will be inelastically low -- no matter what you do to price, people won't want to buy it.  On the other hand, if there is something people really need and there's only one source -- such as a medicine still under patent -- they are likely to buy it even if the price goes up as long as they can scrape together the money.

Last Updated on

How do you calculate elasticity of demand?

Price elasticity of demand is a measure of sensitivity of demand to price. It is mathematically given as the ratio of % change in quantity demanded to % change in its price. The price elasticity of demand can be perfectly elastic, elastic, unit elastic, inelastic and perfectly inelastic. It can be calculated by two methods: Arc elasticity of demand and price point elasticity of demand.

Ed = (P1+P2)/(Q1+Q2)  x (Q2-Q1)/(P2-P1)

where, P1 and P2 are price levels and Q1 and Q2 are quantities demanded at level 1 and 2. This is the equation for arc elasticity of demand and calculates the slope of elasticity curve by averaging over the price (or demand) interval. Since averaging is done, this method is somewhat inaccurate as compared to price point elasticity.

Ed = P/Q x dQ/dP

Here, we calculate the slope at a given price point.

Hope this helps.