product to product because people take different variables into consideration when purchasing a good. Firms value
elasticity because it tells them just how much of an impact their price change will actually have.
For products such as salt, price changes are less likely to attract attention. Substantial changes in the price for salt will
cause only small changes in consumption. But for goods such as cars or vacations, substantial price increases are likely
to produce an elastic reaction by consumers.
■ Price elasticity of demand indicates the responsiveness of the quantity demanded to price changes. Economists
use four measures of elasticity to determine the effects of price changes:
■ The number of close substitutes:If 20 brands of skateboards are available and one of them increases in price,
the quantity demanded for that skateboard company will likely decrease. However, if there are only 2 or 3 skate-
board companies and one of them increases its price for a skateboard, the quantity demanded is less likely to fall,
thereby making it less elastic and more inelastic.
■ How much of your income is spent on the good:If the price of toilet paper were to increase by 50 percent and
the price of airfare were to increase by the same amount, the airfare would be more elastic because of its impact
on your income. The more expensive the good, the more likely it is to be elastic.
■ The personal value of the good:The more important a good is to an individual, the more likely the good will be
inelastic. If a diabetic’s medication increases in price, chances are the good will be inelastic because of its impor-
tance to the diabetic.
■ Time:When producers change their prices, one indicator of elasticity is time. The more time consumers have to
adapt, the more likely they will find cheaper substitutes.Here are the steps for calculating elasticity of demand:
1.Determine the percentage change in price and the percentage change in quantity demanded:
a.Original number – new number
Original number
b. Multiply by 100- Calculate the elasticity:
a.Percentage change in quantity demanded
Percentage change in price
b. Multiply by 100 - If the answer is 1 or greater, the good is elastic. If the answer is lower than 1, the good is inelastic.
The Price Elasticity of Supply
Price elasticity also applies to supply. It measures the relative responsiveness to price changes by producers. The for-
mula for price elasticity of supply is similar to that of demand, except you substitute the percentage change in demand
for the percentage change in supply.
The steps for calculating price elasticity of supply are:
1.Find the percentage change in price and quantity supplied:
a.Original number – New Number
Original Number
b. Multiply by 100- Calculate the elasticity:
a.Percentage change in quantity supplied
Percentage change in price
b. Multiply by 100 - If the answer is 1 or greater, the good is elastic in supply. If the answer is less than 1, the good is inelastic in
supply.
Supply and Demand