What is inelasticity and elasticity?

Question

What is inelasticity and elasticity?

Answer 1

Elasticity is used in economics to show a ratio of a percentage change. So for example price elasticity of demand (PED) shows shows a ratio percentage between price and demand. The point of it is to show the sensitivity of demand to a change in price. The calculation for price elasticity of demand is the percentage change in quantity demanded divided by percentage change in price.

If demand is elastic: PED > -1 (for example -3)

If demand inelastic: PED < -1 (for example -0.5)

Note: demand is always negative except for giffen goods.

If demand is elastic a change in price will give a proportionally greater change in quantity. So if PED = -1.5 , if prices increase by 4%, quantity demanded will fall by 6%.

If demand is inelastic a change in price will give a proportionally smaller change in quantity demanded. So if PED = -0.75 , if prices increase by 4%, quantity demanded will fall by just 3%.

In this answer I have used price elasticity of demand as the main example. However it is worth noting that there are other elasticities such as supply elasticity of demand, income elasticity of demand and cross elasticity of demand being the main ones.

Hope that helps.