What is Elasticity Demand
Elasticity Demand Definition
Elasticity of demand is a significant variant on the concept of demand. Demand can be categorized as elastic, inelastic or unitary.
An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small.
Elasticity Demand Formula
The formula used to calculate the elasticity of demand is:
(Q1 – Q2) / (Q1 + Q2) (P1 – P2) / (P1 + P2)
- If the formula creates an absolute value greater than 1, the demand is elastic. In other words, quantity changes faster than price.
- If the value is less than 1, demand is inelastic. In other words, quantity changes slower than price.
- If the number is equal to 1, elasticity of demand is unitary. In other words, quantity changes at the same rate as price.
What is Elastic Demand
A change in price gives output of a large change in quantity demanded. An example of products with an elastic demand is consumer durables.
These are products that are purchased rarely, like a fridge or a vehicle, and can be adjourned if price increases.
For example, discount in automobile company have been very successful in increasing vehicle sales by reducing price. Close substitutes for a product affect the elasticity of demand.
If another product can easily be substituted for your product, consumers will quickly switch to the other product if the price of your product rises or the price of the other product declines.
What is Inelastic Demand
A change in price gives output of only a small change in quantity demanded. In simple words, the quantity demanded is not very reactive to changes in price. Examples of this are necessities like food and fuel.
Consumers will not reduce their food purchases if food prices increases, even though there may be shifts in the types of food they purchase. Also, consumers will not greatly change their driving behavior if fuel prices increases.
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