Economic Definitions

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

2. 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 supplied
 Price

3. Elasticity can take three forms:
 Elastic:
 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
 i.e. A 10% increase in Price yields a 10%
decrease in Quantity demanded

4. Elasticity is calculated as follows:
 1. Calculate the percentage change in Quantity
Demanded
 Absolute value of [(Initial Quantity – New Quantity) /
((Initial Quantity + New Quantity)/2))] * 100 =
percentage (%) change of quantity demanded
 2. Calculate the percentage change in Price
 Absolute value of [(Initial Price – New Price) / ((Initial
Price + New Price)/2))] * 100 = percentage (%) change
of price
 3. Calculate the Elasticity
 % change of Quantity / % change of Price = Elasticity

5. 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.

6. 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

7. 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

8. 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!