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  Elasticity of Demand

Elasticity of Demand

Elasticity of demand is a significant variation on the theory of demand.  Demand can be divided as elastic, inelastic or unitary. A demand in which there is a variation in quantity demanded because of change in price is large, then it is said to be elastic demand.  A demand in which there is variation in quantity demanded due to a variation in price is small, then it is said to be inelastic demand.  

The formula for calculating elasticity of demand is:

(Q1 – Q2) / (Q1 + Q2)      

(P1 – P2) / (P1 + P2)

If the formula produces a number more than 1 then the demand is elastic.  This means quantity changes faster than price.  If number founds to be less than 1 then the demand is inelastic. This means quantity changes slower than price. And if number is equal to 1 then elasticity of demand is unitary which means quantity changes at the similar rate as price. 

Elasticity of Demand Problem

A Corporation ElastiPad manufactures tablets in competition with the iPad. Their demand curve has revealed that their product is absolutely elastic. Before six months into the release of their fresh product, elastoPad, they decreased the price from $200 to $100 to check the market and their theory that they could increase revenues by producing this change. Idea was a grand success! At price $200, demand for their elastoPad was 20,000 units, and with the reduced price $100 demand increased to 60,000 units! At price $200 revenue was $4 million, while at price $100 profit reached $6 million. With the use of the above formula, to calculate for E, the problem seems like the following:

E = [(60,000 – 20,000) / [(60,000 + 20,000)/2]] / [($200 - $100)/[($200 + $100)/2]]

E = (40,000/40,000) / (100/150)

E = 1 / .67

E = 1.49: E > 1, So this product is taken as elastic.

 

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