Elasticity of Demand

The elasticity of demand measures the responsiveness of quantity demanded to changes in the price of a good. It is a measure of the degree to which the quantity demanded changes in response to changes in the price.

Formula:

Elasticity of Demand (e) = % Change in Quantity Demanded / % Change in Price

Interpretation:

• Positive elasticity: Demand increases when the price increases.
• Negative elasticity: Demand decreases when the price increases.
• Unit elasticity: Demand changes by the same percentage as the price.
• Inelasticity: Demand changes by less than the percentage change in price.
• Elasticity: Demand changes by more than the percentage change in price.

Factors Affecting Elasticity of Demand:

• Availability of substitutes: If there are many close substitutes for a good, demand will be more elastic.
• Importance of the good: If the good is essential for consumers’ well-being, demand will be less elastic.
• Proportion of income spent on the good: If a good consumes a large portion of consumers’ income, demand will be more elastic.
• Price of the good: If the price of a good increases, demand will decrease, and the elasticity of demand will be negative.

Examples:

• A demand curve for a normal good is typically downward-sloping and inelastic.
• A demand curve for a luxury good is typically downward-sloping and elastic.
• A demand curve for a necessity good is typically downward-sloping and relatively inelastic.

Applications:

• Elasticity of demand is used to predict how much demand will change in response to changes in price.
• It is also used to determine the price elasticity of demand for a particular good.
• Elasticity of demand is an important concept in microeconomics and marketing.

Additional Notes:

• Elasticity of demand is a measure of demand responsiveness, not price responsiveness.
• The elasticity of demand is a measure of the change in quantity demanded, not the change in quantity supplied.
• The elasticity of demand can be positive or negative, depending on the direction of change.