The elasticity of demand measures how sensitive the quantity demanded of a good or service is to a change in its price. It is defined as the percentage change in quantity demanded divided by the percentage change in price. This concept helps determine whether demand for a product is elastic, inelastic, or unitary:
- Elastic demand occurs when a small change in price leads to a large change in quantity demanded (elasticity greater than 1). For example, luxury goods or products with many substitutes tend to have elastic demand.
- Inelastic demand happens when changes in price cause only small changes in quantity demanded (elasticity less than 1). Necessities or goods with few substitutes, like gasoline, often have inelastic demand.
- Unitary elasticity means the percentage change in quantity demanded is exactly equal to the percentage change in price (elasticity equals 1).
Mathematically, elasticity of demand is expressed as:
Elasticity of Demand=% change in quantity demanded% change in price\text{Elasticity of Demand}=\frac{%\text{ change in quantity demanded}}{%\text{ change in price}}Elasticity of Demand=% change in price% change in quantity demanded​
If the absolute value of this ratio is greater than 1, demand is elastic; if less than 1, it is inelastic; and if equal to 1, it is unitary elastic
. In practical terms, elasticity indicates how consumers respond to price changes. For example, if the price of apples falls by 6% and the quantity demanded increases by 20%, the elasticity is 20%6%=3.33\frac{20%}{6%}=3.336%20%​=3.33, showing elastic demand
. Overall, elasticity of demand is a crucial concept in economics and business for understanding consumer behavior, pricing strategies, and market dynamics
