Advanced Topics
In a nutshell: Elasticity shows how much buyers and sellers respond to price and income changes.
## How Sensitive Are Buyers and Sellers?
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.
### Price Elasticity of Demand
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:
\[
\text{Price Elasticity of Demand} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}
\]
### Why Elasticity Matters
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!
### Types of Elasticity
- Income elasticity: How demand changes as people get richer or poorer.
- Cross-price elasticity: How demand for one product changes when the price of another product changes.
### Real-World Impact
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}}
Examples
- 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.
Key terms
- Elasticity
- A measure of how much quantity demanded or supplied responds to changes in price or other factors.
- Inelastic
- When quantity demanded or supplied changes very little as price changes.
- Elastic
- When quantity demanded or supplied changes a lot as price changes.