Advanced Placement Microeconomics analyzing individual economic decision-making.
Elasticity measures how much quantity demanded or supplied changes when prices change. It tells us how responsive people are to changes in price or other factors.
If a small price change causes a big change in how much people buy, demand is considered elastic. If people keep buying about the same amount, demand is inelastic.
The formula for price elasticity of demand is:
\[ \text{Price Elasticity of Demand} = \frac{%\ \text{change in quantity demanded}}{%\ \text{change in price}} \]
Elasticity helps businesses set prices. If demand is elastic, raising prices could mean losing lots of customers. If it’s inelastic, they might get away with a price hike!
Governments use elasticity to predict how taxes or subsidies will affect markets and people’s behaviors.
\[\text{Price Elasticity of Demand} = \frac{%\ \text{change in quantity demanded}}{%\ \text{change in price}}\]
Gasoline has inelastic demand—people still need to drive even if prices rise.
Luxury handbags have elastic demand—a price increase can cause sales to drop sharply.
Elasticity shows how much buyers and sellers respond to price and income changes.