Elasticity of Demand: Understanding Price Sensitivity

University:
Stanford University
Course:
ECON 1 | Principles of Economics
Academic year:

2024
Views:

167

Pages:

2
Author:

larbi43100

Elasticity The elasticity of demand therefore corresponds to the relative variation in the quantity demanded when the price increases (or falls) by 1%. Under the law of demand, the relative change in quantity is always in the opposite direction to the relative change in price. We retain the convention according to which it is indicated to take the absolute value of this ratio of relative variations. In the general case, the elasticity of demand varies between zero and infinity. ⮚ Ifep= 0 ==> demand is extremely inelastic or perfectly inelastic because the quantities demanded are insensitive to any variation in price. ⮚ If 0 demand is inelastic, with quantities demanded varying inversely but less proportionally than price. ⮚ Ifep= 1 ==> the quantities requested vary in the same percentage as the price. We say that demand is iso-elastic. ⮚ If 1 demand is elastic, since the quantities demanded vary more proportionally than the price. ⮚ Ifep→ ∞==> demand is perfectly elastic or extremely elastic following a slight change in price, the quantity demanded becomes zero. V-2-1-2-1 / Income :each consumer has an income which he devotes to consumption. Following an increase in income, consumption increases. It happens that an increase in income does not result in an increase in consumption but in the creation of savings. This behavior is highlighted by the calculation of the elasticity of demand in relation to to income. The elasticity of demand in relation to income makes it possible to: