 # elasticity of demand- calculation

I’ve used the search feature on this website already for this one, so please excuse me if this one was already asked/answered: If the price of X increases from \$2.00 per unit to \$2.25 per unit, the demand will decrease from 7.5 million to 6.7 million units. What is the price elasticity of demand for the product, and is the demand for the product elastic or inelastic? The “answer people” think that the product is inelastic with elasticity of -.096. I disagree since if the demand for the product goes down if the price goes up, that means the demand is elastic (if the price changes the demand decreases). I think of elasticity as a elastic on a pair of pants. If the elastic is loose, it is more flexible, and INELASTIC. If it is tight, then there is little flexibility (someone has to lose weight or buy new shorts) and it is ELASTIC. As far as the calculation goes, I have no clue how they got to -.096.

bigfin, remember that the demand curve is downward sloping almost always. That tells you right there that there is an inverse relationship between price and qty demanded. Elasticity is like duration kinda, it just measures the sensitivity of something when something else changes. In this case it measures the change in qty demanded when price changes. If the number is low, i.e. inelastic, then the qty demanded does not go down by much even when the price goes up. That’s usually the case with necessities that don’t have close substitutes, let’s say some medication or something. That doesn’t mean that qty doesn’t go down, it just means that it doesn’t go down by much.

(6.7-7.5) / [(6.7+7.5)/2] / (2.25-2)/[(2+2.25)/2] = -0.96 i.e. change in qty demanded divided by change in price(using the average as the denominator) The number is close to 0, that means it is inelastic, or a 12% change in price results in a 11% change in quantity. Not much change = inelastic demand

shob Wrote: ------------------------------------------------------- > (6.7-7.5) / [(6.7+7.5)/2] / (2.25-2)/[(2+2.25)/2] > > = -0.96 > > i.e. change in qty demanded divided by change in > price(using the average as the denominator) > > The number is close to 0, that means it is > inelastic, or a 12% change in price results in a > 11% change in quantity. Not much change = > inelastic demand Inelastic means that a change in price leads to a less significant change in demand. So if |elasticity| (ie the absolute value of elasticity) is < 1 then it is inelastic. If |elasticity|>1, demand is elastic. So this is slightly inelastic.

If the absolute value of the number is less than 1, it is inelastic. Greater than 1 (absolute value) and it’s elastic.

All good posts above. To add one observation to chrismaths’ post: demand for luxury items (e.g. fine jewelry, cars) tends to be relatively price elastic (>1), whereas demand for necessary goods (e.g. oil, food staples) tends to be relatively price inelastic (<1).