Elasticity Of Demand - SS1 Economics Lesson Note

The elasticity of demand is a measure of how responsive the demand for a good or service is to changes in its price or other economic factors. It is calculated as the percentage change in quantity demanded divided by the percentage change in the price of the good or service. 

When the demand for a good or service is elastic, a small change in its price results in a large change in the quantity demanded. In contrast, when the demand is inelastic, a change in price results in a relatively smaller change in the quantity demanded.

Elastic demand means that the quantity demanded of a good change significantly in response to a change in its price. Gasoline is good with many close substitutes and is not considered a necessity for most consumers, which means that consumers are more likely to reduce their consumption significantly in response to a price increase. For example, if the price of gasoline were to increase significantly, consumers may take public transportation or purchase more fuel-efficient cars, all of which would reduce their demand for gasoline. The elasticity of demand is an important concept in economics because it helps businesses and policymakers understand how consumers will react to changes in prices or other economic factors.

Factors that affect the elasticity of demand:

There are several factors that can affect the elasticity of demand, including:

• Availability of substitutes: When there are close substitutes available for a product, consumers can easily switch to alternatives if the price increases, making the demand for the product more elastic.

The necessity of the product: If a product is considered a necessity, consumers may continue to purchase it even if the price increases, making the demand for the product more inelastic.

Income of consumers: When consumers have a higher income, they may be less sensitive to price changes, making the demand for the product more inelastic.

Time: The longer the time period consumers have to adjust to a change in price, the more elastic the demand becomes, as they have more time to search for substitutes or adjust their consumption patterns.

Brand loyalty: Consumers who are loyal to a particular brand may be less sensitive to price changes, making the demand for the product more inelastic.

Market competition: In a highly competitive market, businesses may not be able to raise prices without losing customers, making the demand for the product more elastic.