If you’ve ever wondered why the price of your favorite candy bar changes or why some products are more expensive than others, you might be interested in learning about elasticity. Elasticity is a measure of how sensitive the demand for a product is to changes in price.
Calculating elasticity can help you make important decisions about pricing and marketing your products. In this beginner’s guide, we’ll explain what elasticity is and show you how to calculate it.
What is Elasticity?
Elasticity is a measure of how much the demand for a product changes when the price of that product changes. When a product is highly elastic, even small changes in price can cause a big change in demand. When a product is inelastic, changes in price have little effect on demand.
For example, let’s say the price of a bag of apples goes up by 10%. If the demand for apples stays about the same, the elasticity of apples is low. But if the demand for apples drops by 20% when the price goes up by 10%, the elasticity of apples is high.
How to Calculate Elasticity
To calculate elasticity, you need to know two things: the percentage change in price and the percentage change in demand. Here’s the formula:
Elasticity = Percentage Change in Demand / Percentage Change in Price
Let’s say the price of a product goes up by 20% and the demand for that product goes down by 10%. Here’s how you would calculate elasticity:
Elasticity = -10% / 20% = -0.5
The negative sign indicates that the product is inelastic, meaning that changes in price have little effect on demand.
Understanding elasticity can help you make informed decisions about pricing and demand for your products. By calculating elasticity, you can determine whether your product is highly sensitive to changes in price or relatively unaffected by price changes.
We hope this beginner’s guide has helped explain what elasticity is and how to calculate it. If you have any questions or want to learn more about economics, be sure to check out Khan Academy’s other resources.
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