Elasticity of Demand

What is elasticity of Demand?

Demand elasticity means how a demand for something relies on other economic variables like price of a product and what the income of a consumer is. Demand elasticity is calculated as the percent change in the quantity demanded divided by percent change in other economic variable.

Types of Demand Elasticities

One common type of demand elasticity is the price elasticity of demand; it shows how the change in the quantity demanded for a good is related to change in its price. Companies collect data on change in price and how consumers respond to such changes. They then adjust their prices accordingly to maximise profit.

Another type of Demand Elasticity is cross elasticity of demand it shows how a quantity demanded of one good reacts when the price of another good changes.

If demand elasticity is greater than 1 then it is sensitive to economic change (like price). If demand elasticity is less than 1 then it is not sensitive to economic change and if the demand elasticity is equal to 1 then that means its demand will change proportionally to economic change.

Example

Suppose a company calculated that a demand for that companies chips increased from 500 to 550 because they decreased their price from 25Rs to 20Rs.

The price elasticity of demand is calculated as the percentage change in quantity demanded (550-500/500=10%) divided by percentage change in price (25-20/25=20%) so, the price elasticity of demand for this example is 0.5. Since the result is less than 1, it is inelastic i.e. the change in price has little effect on the quantity demanded.

Referred from (https://www.investopedia.com/terms/d/demand-elasticity.asp

And principles of microeconomics by N.Gregory Mankiw)