While the laws of demand and supply state that the quantity demanded and supplied will change with a price change, it is very important to know by how much the quantity demanded and supplied changes. Elasticity refers to responsiveness. A strong response (more than proportional response) to a price change is known as elastic demand or supply.
A weak response (less than proportional response) to a price change is known as inelastic demand or supply.
A coefficient (number) of elasticity can be calculated.
A coefficient of more than one - ELASTIC
A coefficient of less that one - INELASTIC
Formula 1
% changes in quantity / % changes in price
Example:
If the quantity demanded of a good increased by 600 from 1000 as a result of its price falling from $20 to $12, what is the coefficient of elasticity?
60% / 40% = 1.25
The product has elastic demand.
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