ELASTICITIES OF SUPPLY AND DEMAND

1. Usually, elasticity is a measure of the sensitivity of one variable to the other.
2. It told us the percentage change in one variable in response to a one percent alteration in another variable.
3. Price Elasticity of Demand

•      Calculates the sensitivity of quantity demanded with price changes.
•      It calculates the percentage change in the quantity demanded for a good or services that results from one percent change in the price of that particular good or service.

1.  The price elasticity of demand is:

– The percentage change in a variable is the complete change in the variable divided by original level of the variable.

– Thus the price elasticity of demand is also:

2. Interpreting Price Elasticity of Demand Values

 1) Due to the inverse relationship between P and Q; EP is -ve.

 2) If IEPI > 1, the percent change in quantity is more than the percent change in price.  We state that the demand is price elastic.

3) If IEPI < 1, the percent change in quantity is less than the percent change in price.  Then we say that the demand is price inelastic.

3. The basic determinant factor for price elasticity of demand is the accessibilty of substitutes.

– Many substitutes demand is price elastic

– Some substitutes demand is price inelastic

Price Elasticities of Demand