elasticity (economics)
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Elasticity (economics)
In economics, the measure of response of one variable to changes in another. Such measures are used to test the effects of changes in prices and incomes on demand and supply.
Price elasticity of demand measures the responsiveness of changes in quantity demanded to a change in price of the product. It is measured by the formula:
For example, if the price of butter is reduced by 10% and the demand increases by 20%, the price elasticity of demand is +2.
Goods with a price elasticity of less than 1 are said to be inelastic. Goods with a price elasticity greater than 1 are said to be elastic. Necessities such as water tend to be inelastic: the demand remains much the same even if the price changes considerably.
Income elasticity of demand measures the responsiveness of changes in quantity demanded to a change in income. It is measured by the formula:
For example, if incomes rise by 10% and the demand for meat increases by 20%, then the income elasticity of demand is +2.
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