Understanding Elasticity

Readers Question: I need help with elasticity I don’t quite understand it thanks

Elasticity is a concept which involves examining how responsive demand (or supply) is to a change in another variable such as price or income.

The Most common elasticity is Price Elasticity of Demand. This measures how responsive demand is to a change in price.

Inelastic Demand 

For example, if the price of rice increased by 10%, your demand may only fall by 1%. Therefore your PED would be -1/10 = -0.1. We say that your demand is Inelastic. In other words the higher price does little to reduce your demand. Other inelastic goods might involve:

• oil,
• petrol
• coffee
• cigarettes.

With all these goods, there are few substitutes and for many people they are necessities. E.g. if you drive a car to work, it is a necessity to buy petrol. Therefore, if the price of petrol goes up you are likely to keep buying it.

Elastic demand means that you are sensitive to changes in price. For example, if the price of Sainsbury’s Caledonian mineral water increases, you would probably switch to other varieties of mineral water. Therefore your demand is quite elastic.

Calculating Elasticity of Demand 

Forumula’s for Elasticity 

Making Use of Elasticity 

Elasticity can be used to explain and understand decisions of firms such as price discrimination. See why some firms give students a 10% discount