Topic 2 · micro
Elasticity
Elasticity shows how strongly the quantity demanded or supplied reacts to a change in price.
Price elasticity of demand
The ratio of the percentage change in quantity demanded to the percentage change in price. Demand is elastic (>1) — it reacts strongly; inelastic (<1) — weakly.
What it depends on
Availability of substitutes, the share of the budget, how essential the good is, and time. For essential goods demand is usually inelastic.
Why business cares
If demand is inelastic, a price rise increases revenue; if elastic, it lowers it. That is why elasticity matters for pricing.
🎯 Now possible
- calculate the price elasticity of demand
- tell elastic from inelastic demand
- link elasticity to revenue
Cheat sheet
E = %ΔQ / %ΔP
E>1 — elastic, E<1 — inelastic
Inelastic: price↑ → revenue↑
Elastic: price↑ → revenue↓
More substitutes → more elastic
Practice on this topic
Where to read more: Мэнкью — гл. 5Макконнелл–Брю — гл. 6