Elasticity of demand measures how the quantity demanded of a good responds to changes in various factors, such as price, income, or the price of related goods. It is primarily expressed as price elasticity of demand, which quantifies the responsiveness of quantity demanded to a change in price. Mathematically, it can be represented as:
If , the demand is considered elastic, meaning consumers are highly responsive to price changes. Conversely, if , the demand is inelastic, indicating that quantity demanded changes less than proportionally to price changes. Understanding elasticity is crucial for businesses and policymakers, as it informs pricing strategies and tax policies, ultimately influencing overall market dynamics.
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