Elasticity is a measure of the responsiveness of a variable to a change in another variable. It is an important concept in economics and business, as it helps us understand how changes in price, income, or other factors impact the quantity demanded or supplied of a good or service.
The general formula for calculating elasticity is (% change in quantity / % change in price). This gives us the percentage change in quantity demanded or supplied for a one percent change in price.
Goods can be classified as elastic or inelastic based on their elasticity. If a good has an elasticity greater than 1, it is considered elastic, meaning that a change in price will have a relatively large impact on the quantity demanded or supplied. If a good has an elasticity less than 1, it is considered inelastic, meaning that a change in price will have a relatively small impact on the quantity demanded or supplied.
Price elasticity measures the responsiveness of quantity demanded or supplied to a change in price, while income elasticity measures the responsiveness of quantity demanded to a change in income. Both are important in understanding consumer behavior and market trends.
Elasticity can be used to make informed business decisions, such as setting prices, determining the impact of taxes or subsidies, and predicting changes in demand for a product. By understanding the elasticity of a good or service, businesses can adjust their strategies to maximize profits and stay competitive in the market.