Elasticity is a key concept in economics that measures the sensitivity of one variable to changes in another. When analyzing how the quantity demanded of a product responds to changes in its price, the relevant measure is the price elasticity of demand. This concept is integral to the supply and demand model, as it quantifies the responsiveness of consumers to price fluctuations.
The price elasticity of demand, denoted as ED, is calculated using the formula:
\[E_D = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}\]
For example, if a restaurant offers a 10% discount on meals, the percent change in price is -10%. Suppose this discount leads to a 20% increase in the number of meals sold, meaning the percent change in quantity demanded is +20%. Converting these percentages to decimals and substituting into the formula gives:
\[E_D = \frac{0.20}{-0.10} = -2\]
The negative sign arises because price and quantity demanded move in opposite directions, consistent with the law of demand. When prices fall, quantity demanded rises, and vice versa. If the price were to increase by 10%, the quantity demanded would decrease, resulting in a negative elasticity value again. Since the price elasticity of demand is always negative, economists typically use the absolute value to simplify interpretation, so the elasticity in this example is expressed as 2.
It is important to note that elasticity is a unitless measure, meaning it does not correspond to specific quantities or percentages but rather indicates the relative responsiveness of demand to price changes. This characteristic allows for comparison across different products and markets, although interpreting whether a value like 2 represents high or low elasticity requires further context.
