In economics, elasticity is defined as a measure of how much buyers and sellers respond to changes in market conditions. Elasticity is mainly divided into four reactions, which are the price elasticity of demand, income elasticity of demand, cross-price elasticity of demand and price elasticity of supply.
According to the law of demand, a decrease in price of a good will increase the quantity demanded. This reaction is known as price elasticity of demand. The price elasticity of demand is a measure of the degree of responsiveness of the quantity demanded of a good to a change in its price (Worthington, Britton and Rees, 2005). In terms of formula, price elasticity of demand is,
Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price
Coefficients of price elasticity of demand can be interpreted into three, which are elastic demand, inelastic demand and unit elastic demand. Elastic demand is when percentage change in price results in a larger percentage change in quantity demanded (McConnell, Brue and Flynn, 2009). Figure 1 shows the graph of elastic demand curve. As for inelastic demand, the percentage change in price produces a smaller percentage change in quantity demanded (McConnell, Brue and Flynn, 2009). Graph can be seen on Figure 2. Lastly, unit elastic demand occurs when percentage change in price is equal to the percentage change in quantity demanded. Figure 3 shows the graph of unit elastic demand.
Figure [ 1 ] Elastic demand curve.
Figure 2 Inelastic demand curve.
Figure [ 3 ] Unit elastic demand curve.
Income elasticity of demand is a measure of responsiveness of quantity demanded to a change in income. The coefficient of income elasticity of demand is determined with a formula. That is,
Income elasticity of demand = Percentage change in quantity demanded
Percentage change in income
Income elasticity of demand can be interpreted into three goods. Those goods are normal goods,...