What Is Elasticity?

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 8 (2710 words) Published: August 27, 2012
We have studied a host of demand determinants and how supply and demand curves act together to determine market equilibrium, and how shifts in these two curves are reflected in prices and quantities consumed and how. The change in these demand determinants brings about a change in the market demand for goods and services. Not all curves are the same, however, and the steepness or flatness of a curve can greatly alter the affect of a shift on equilibrium. Elasticity refers to the relative responsiveness of a supply or demand curve in relation to price: the more elastic a curve, the more quantity will change with changes in price. In contrast, the more inelastic a curve, the harder it will be to change quantity consumed, even with large changes in price. For the most part, Goods with elastic demand tend to be goods which aren't very important to consumers, or goods for which consumers can find easy substitutes. Goods with inelastic demands tend to be necessities, or goods for which consumers cannot immediately alter their consumption patterns. Elasticity of demand measures the responsiveness of change in quantity demanded of a good because of change in prices. If a curve is more elastic, then small changes in price will cause large changes in quantity consumed.

The concept of elasticity is used to mathematically and thus, precisely measure the changes in demand in quantitative terms. The demand depends upon various factors such as the price of a commodity, the money income of consumer the prices of related good the taste of the people etc.The elasticity of Demand measures responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant. The term elasticity of demand measures the extent of changes in the quantity demanded of a given commodity as a result of the change in the demand in the determinant. If that is so, the types of demand elasticities must equal the number of demand determinants. However, from the managerial and business point of view, only few of the demand determinants are given serious consideration and therefore the elasticities that we undertake to study are:


• Price Elasticity of demand.
• Income Elasticity of demand.
• Cross Elasticity of demand.
• Advertisement Elasticity of demand.

Price elasticity of demand.
Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.

PED is derived from the percentage change in quantity (%ΔQd) and percentage change in price (%ΔP).


The above formula usually yields a negative value, due to the inverse nature of the relationship between price and quantity demanded, as described by the "law of demand".For example, if the price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of...
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