Elasticity

Elasticity:

Elasticity is a measure of the responsiveness of quantity demanded to a change in the price level of the product, a product may be perfectly elastic, perfect inelastic and unitary, when a good’s elasticity is perfectly inelastic then a change in the price of the product will not change the amount demanded, a perfect elastic product is that which its demand will change by a large magnitude than the change in price.

The formula for calculating elasticity is as follow

E = (change in demand / change in price) multiplied by the (price/ demand)

E = (D2 – D1/ P2 – P1) X (P1 /D1)

Where

D1 is the demand before price increase

Elasticity

D2 is the demand for the product after price increase

P1 price before increase

P2 price after increase

E is elasticity

For our question where the price of apples rises from $3 a pound to $3.50 and the consumption of apples drops from 35 pounds of apples a month to 20 pounds of apples, we will analyze this graphically as follows:

When the price increases from P1 to P2 then the demand will decline as shown in the above diagram and this is from D1 to D2.

In our case the price elasticity of demand will be given by the formula:

E = (D1 – D2/ P1 – P2) X (P1 /D1)

Elasticity

P1=3

P2 = 3.5

D1=35

D2=20

D1–D2=15

P2–P1=0.5

P1 /D1 = (3/35)

E = 2.571429

The following diagram demonstrates the various elastic ties that a product can have

Elasticity

From the above diagram the various elasticity’s are demonstrated

Demand curve 1 is perfectly elastic

Demand curve 2 is unitary elasticity

Demand curve 3 is perfect inelastic

From our answer above we can say that our demand curve resembles that of demand curve 2 although in our case our demand is elastic, this is because a change in the price will lead to a change in the demand of the product.

Elasticity

References:

Elasticity

Stratton (1999) Economics: A New Introduction, McGraw Hill Publishers, New York

Philip Hardwick (2004) Introduction to Modern Economics, Pearson Education Press, UK

Anthony Samuelson (1964) Economics, McGraw-Hill publishers, New York