What is it and how is it measured? Elasticity of Demand What is it and how is it measured?

Elasticity Defined Elasticity is defined by Amosweb.com as “The relative response of one variable to changes in another variable”. For our Economics purposes, the definition further states that “the price elasticity of demand, one of the more important applications of this concept in economics, is the percentage change in quantity demanded measured against the percentage change in price.” Thus, the two variables in question are: The quantity demanded Price

Elasticity can take three forms: When the quantity demanded is very sensitive to price Inelastic: When the quantity demanded is not very sensitive to price Unitary Elastic When the quantity demanded moves in lock-step with price change

Elasticity is calculated as follows: 1. Calculate the percentage change in Quantity ((Initial Quantity – New Quantity) / Initial Quantity) * 100 = percentage (%) change of quantity 2. Calculate the percentage change in Price ((Initial Price – New Price) / Initial Price) * 100 = % change of supply 3. Calculate the Elasticity % change of Quantity / % change of Price = Elasticity

What do the numbers mean? If the result of the Elasticity calculation is greater than 1, the relationship is said to be Elastic. If the result of the Elasticity calculation is less than 1, the relationship is said to be Inelastic. If the result of the Elasticity calculation is exactly 1, the relationship is said to be Unitary Elastic.

Elastic Demand When Demand is Elastic, price has a large impact on the demand for a good. This is generally true for luxury items, such as Jewelry, as they are not required to exist. Examples Include: Jewelry Houses Cars

Inelastic Demand Inelastic Demand indicates that price has very little impact on the demand for a good. This is generally true for essentials, such as Food, as they are required to exist. Examples Include: Food Clothing Utilities

Unitary Elastic Demand Unitary Elastic Demand indicates that the percentage change in the price of the good will equal the percentage change in the demand for the good. Examples Include: Any good with an Elasticity of Demand Calculation equaling 1!

What is it and how is it measured? Elasticity of Supply What is it and how is it measured?

Elasticity Defined Elasticity is defined by Amosweb.com as “The relative response of one variable to changes in another variable”. For our purposes, the two variables are: The quantity supplied Price

Elasticity can take three forms: When the quantity supplied is very sensitive to price Inelastic: When the quantity supplied is not very sensitive to price Unitary Elastic When the quantity supplied moves in lock-step with price change

Elasticity is calculated as follows: 1. Calculate the percentage change in Quantity ((Initial Quantity – New Quantity) / Initial Quantity) * 100 = percentage (%) change of price 2. Calculate the percentage change in Price ((Initial Price – New Price) / Initial Price) * 100 = % change of supply 3. Calculate the Elasticity % change of Quantity / % change of Price = Elasticity

What do the numbers mean? If the result of the Elasticity calculation is greater than 1, the relationship is said to be Elastic. If the result of the Elasticity calculation is less than 1, the relationship is said to be Inelastic. If the result of the Elasticity calculation is exactly 1, the relationship is said to be Unitary Elastic.

Elastic Supply When Supply is Elastic, price has a large impact on the supply for a good. Elastic Supply often reflects a longer period of time as Supply is often difficult to change in the short term as many production factors must be considered. Put simply, if a Producer can collect a large price for an item, they will supply more of it – as soon as they can.

Inelastic Supply When Supply is Inelastic, price does not have a large impact on the supply for a good. Inelastic Supply generally reflects a short period of time as Supply is often difficult to change quickly as many production factors must be considered. Essentials, such as food, are generally Inelastic.

Unitary Elastic Supply When Supply is Unitary Elastic, price and quantity demanded move in lock step. This indicates that the percentage change in the price of the good will equal the percentage change in the demand for the good. This is a special case scenario.