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Elasticity Details

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Submitted By heahergin07
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Elasticity measurs the responsiveness of quantity demanded to changes in price. Elasticity tells us how the change in one thing has an impact on another thing. This is important because it helps businesses decide on the best course of action to take regarding their business prices. It also helps the government and the business to understand if what they are doing is producing results or not.The rate at which the quantity demanded changes in response to a change in price is called price elasticity of demand. When a large change in price has a small effect of demand this is called inelastic demand, but when a small change in prices has a big effect on demand it is called elastic demand.
If the price of a laptop increases by 20% and there is a 40% drop in the quantity demanded then the price elasticities of demand would be -2 which means that it would be inelastic because the absolute value of elasticity is less than 1.
If the price of a pack of cigarettes increases by 10% and there is a 5% drop in the quantity demanded then the price elasticities of demand would be –0.5 which means that it would be inelastic because the absolute value of elasticity is less than 1.
Of the above examples laptop is more elastic because it is a luxury good and consumers may reduce its use or substitute it for something else in the case of a rise in prices. Cigarettes are an addictive commodity which may cause many consumers not to reduce their consumptions of them which makes it the least elastic.
Elasticity is an important concept for a business because businessmen use the concept of price elasticity to decide on their pricing strategy of their business. In a bridge toll business elasticity is an important concept because they are most driven by the price elasticity of demand. This allows them to estimate what the price should be of a toll to reduce congestion to a certain level.

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