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Elasticity of Demand Formula:
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Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. It indicates the percentage change in quantity demanded resulting from a 1% change in price.
The calculator uses the elasticity of demand formula:
Where:
Example: If quantity increases from 100 to 120 units (20% increase) and price decreases from $10 to $9 (10% decrease), the elasticity is: \[ ED = \frac{20\%}{-10\%} = -2 \] The absolute value is typically used: |ED| = 2
Details: Understanding price elasticity helps businesses set optimal prices, predict revenue changes, and develop effective pricing strategies. It also informs government policy decisions regarding taxation and subsidies.
Tips: Enter initial and final quantities and prices. Positive values indicate increases, negative values indicate decreases. All values must be greater than zero.
Q1: What does different elasticity values mean?
A: |ED| > 1 = elastic, |ED| < 1 = inelastic, |ED| = 1 = unit elastic, |ED| = 0 = perfectly inelastic, |ED| = ∞ = perfectly elastic.
Q2: Why is elasticity usually negative?
A: Due to the law of demand - price and quantity move in opposite directions. However, we often use the absolute value for interpretation.
Q3: What factors affect elasticity of demand?
A: Availability of substitutes, necessity vs luxury, time period, proportion of income spent, and brand loyalty.
Q4: How does elasticity affect total revenue?
A: For elastic demand, price decrease increases revenue. For inelastic demand, price increase increases revenue.
Q5: What's the difference between point and arc elasticity?
A: Point elasticity uses derivatives for infinitesimal changes, while arc elasticity (this calculator) uses discrete changes between two points.