Elasticity of Demand

Elasticity is one of the more crucial and important concepts in economics. There is a close connection between three different factors, supply, demand and price. For example, if demand increases, but supply falls, then there will be a rise in prices. Often we know something about two of these three quantities and we want to know how big the effect will be on the third.

As we know, the effects on demand when there is a change in price are greater for some commodities than for others. The demand for some items will change very little, even though there might be a considerable price change. For example, people generally buy as much salt as they require; so if there is a sudden price drop, it doesn’t mean they are going to increase the amount they purchase. Similarly, the price of salt would have to rise exponentially for people to stop buying salt.

However, the demand of other food stuffs, like chocolate, is highly responsive to a price change. A small price change will lead to a large change (or stretching) in demand, in this case demand id said to be elastic. Conversely, demand is inelastic when little or no change in demand is the result of a change in price, as with salt.

To conclude, elasticity of demand is a term used to describe how sensitive the quantity of demand is to a change in price.