Elasticity (economics)/Tutorials: Difference between revisions

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The best-known application of the concept of elasticity is to the effect of a price change on the demand for a marketed product. The "''price elasticity of demand''" for a product is the proportionate decrease in demand for a product divided by the proportionate increase in its price.
The best-known application of the concept of elasticity is to the effect of a price change on the demand for a marketed product. The "''price elasticity of demand''" for a product is the proportionate decrease in demand for a product divided by the proportionate increase in its price.
Supposing that  Q is the quantity of a product that would be bought by  by consumers when its price is P, and that  Q is related to P by the equation:
:::<math> Q  = -AP + B</math>
- then the elasticity of demand, ''E'',  for the product is given by:
:::<math>E  = (dQ/Q)/(dP/P)</math>,  or
:::<math>E  = (dQ/dP)(P/Q)</math>,
- where dQ and dP are small changes in the values of Q and P.
It can be shown that, for the simplified linear example,:
:::<math>dQ/dP  = -A</math> so that <math> E = -A(P/Q)</math>
- and E will vary in value with different values of P and Q  because as  P increases the fraction P/Q will increase.
The terms "''elastic''" and "''inelastic''" are applied to commodities for which  E is respectively ''numerically'' (ie ignoring the sign) greater or less than 1. If the elasticity of demand for a product is greater than 1,  a price increase will lead to a fall in the amount PQ spent on the product, because demand Q will fall more than the rise in P. Conversely, if its elasticity is numerically less than 1, a price rise will result in a rise in the amount spent on it.

Revision as of 15:34, 3 February 2008

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Tutorials relating to the topic of Elasticity (economics).

Elasticity of Demand

The best-known application of the concept of elasticity is to the effect of a price change on the demand for a marketed product. The "price elasticity of demand" for a product is the proportionate decrease in demand for a product divided by the proportionate increase in its price.

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