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What is meant by "concept of elasticity of demand"?

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Quick Answer

The "concept of elasticity of demand" measures the relationship between a change in the price of a product and the corresponding change in the quantity demanded of that product. The elasticity of demand may be perfectly elastic, perfectly inelastic or somewhere between the two.

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What is meant by "concept of elasticity of demand"?
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Full Answer

Elasticity of demand is found by dividing the percentage of the change in quantity by the percentage of the change in price. If the quotient is zero, demand is perfectly inelastic, which means that a change in price yields no change in the quantity demanded. If the quotient is one, demand is perfectly elastic, which means that a change in price yields an equivalent change in quantity demanded. Most goods fall somewhere between perfectly inelastic and perfectly elastic. Businesses use demand elasticity to predict the effect of price on product sales.

Elasticity of demand is determined by several factors, including the availability of substitute products, the cost of switching between products, and whether the product is a necessity or a luxury. Products that have readily available substitutes tend to be more elastic than goods with few substitutes. Necessities tend to be more inelastic than luxuries. Products with high-switching costs are more inelastic than goods with lower-switching costs.


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