How does elasticity affect price?

1 Answer
Aug 17, 2015

Answer:

This question is mis-directed, because elasticity tells us how changes in price affect quantity demanded, when considering a specific demand curve.

Explanation:

Actually, elasticity could refer to price elasticity, but it could also refer to income elasticity or cross-price elasticity of demand. However, the implication of the question seems to narrow the focus to price elasticity of demand. We define this as the ratio of the percentage change in quantity demanded to the percentage change in price -- usually when we are considering small, incremental changes in price.

When the ratio is greater than 1, the percentage change in quantity demanded is greater than the percentage change in price. Economists say that demand is price-elastic in this case. When the ratio is less than 1, the percentage change in quantity demanded is less than the percentage change in price. Economists say that demand is price-inelastic in this case. If the ratio is exactly 1, economists call this unit elastic.

In other words, when demand is price elastic, the quantity demanded changes a lot (responds like a loose rubber band being stretched) for incremental changes in price. When demand is price inelastic, the quantity demanded changes very little (responds more like a piece of wood being stretched) for incremental changes in price.