Economics Part B

Table of Contents

Elasticity

Understanding What is Elasticity

The term elasticity in economics refers to the extent to which data of any kind are affected by changes in another factor. For example: how is the quantity of shirts bought affected by changes in the price of shirts.

The elasticity is expressed as a number. The higher the number, the greater the degree of elasticity.

The exact definition of elasticity for a particular product:

Elasticity = % change in quantity

Change of 1% in price

Example

We are examining the degree of elasticity of demand for shirts, which is the change (percentage) in the quantity of shirts that we want to buy as a result of a change of 1% in the price of shirts. In our example the initial stage is that the price of shirts is $100 and the quantity demanded is 10k shirts (Graph 14.1). (k = 1,000, 10k = 10,000).

The price of shirts is reduced to $99 (= a reduction in price of 1%).

The quantity demanded increases to 11k, an increase of 10% (point B)

In this example, the elasticity at Point A is 10.

Remember: The elasticity is not uniform over the demand curve. Thus it is important when discussing elasticity to state the point for which calculation is being made, in the following manner:

The elasticity at point A is 10. The elasticity at point B is 9 (assuming this is the case)

Graph 14.1

Elasticity