Demand Elasticity Formula
Demand Elasticity Formula is usually one of the first mathematical concepts taught in economic coursework. While practical in many fields, it is typically applied towards price and demand, showing how elastic, or how responsive demand is to changes in prices. It can also be used for prices in terms of currency in circulation, a change in demand as income changes and other situations.
The demand elasticity formula is most usually negative, however when analyzing the result, most economists ignore the sign, as they are seeking the degree of responsiveness. In general demand elasticity formula yields inelastic, where the demand elasticity formulayields a number less than 1 upon taking its absolute value or elastic, when the demand elasticity formula yields a number larger than 1.
|Ed = 0||Perfectly inelastic demand|
|– 1 < Ed < 0||Inelastic or relatively inelastic demand|
|Ed = – 1||Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand|
|– ∞ < Ed < – 1||Elastic or relatively elastic demand|
|Ed = – ∞||Perfectly elastic demand|
To calculate elasticity simply use the demand elasticity formula: take the percent change in Y over the percent change in X, or the elasticity of Y with respect to X.
demand elasticity formula:
Ed=%change in quantity demanded / %change in price
Example: elasticity example (excel file)
Demand Elasticity formula, originally in its price elasticity form, was originally coined by Alfred Marshall in his book, Principals of Economics back in 1890. “And we may say generally:— the elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price”.
The general concept behind the demand elasticity formula is the willingness of a consumer to continue making a purchase of a good after a price increase. Factoring into their decision is brand loyalty, the duration of the price change, whether substitute goods are available, and necessity.
Brand loyalty is a staple of marketing and giving a company market power. When using the demand elasticity formula brand loyalty tends to make products inelastic, or not very responsive to changes. Consumers will spend a higher price for a product of a brand they know they trust and already have an history with.
In terms of duration concerning the demand elasticity formula, the longer a consumer has to respond to the price change, the more likely they will search for substitutes.
Necessity will have a large impact on determining the elasticity of a good or service. If it is needed to survive, such as one’s medicine, then the good tends to be less elastic. However if it is a luxury the product will be more elastic when using the demand elasticity formula.
One of the most important factors in demand elasticity formula calculation is the availability of substitute goods or services. If Brand A goes up in price Brand B can easily take its place, making the good elastic.
Firms may seek to use the demand elasticity formula to calculate the effect a price change will have on total revenue. Generally a change in price will affect the revenues and quantities sold. When prices are increased revenues tend to go up and when prices decreased revenues go down. If prices go up quantities sold tend to go down and if prices do down quantities sold go up.
The demand elasticity formula can be applied towards all products.