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Elasticity of Demand

W. J. Rayment / -- A rubber band is said to be elastic. It stretches. However, elasticity as it may be applied to demand of a product in an open market does not so much describe its stretchability as its responsiveness to price.

It is well known in economic circles that when the price of an item rises, fewer of the items are sold. The rate at which the sales of an item declines is called elasticity of demand. The greater the decline, the greater the elasticity.

Products will vary greatly in their elasticity. Necessary products like fuel and medicine tend to be less elastic. This is because they are quite vital to the running of the economy. Though an increase in fuel prices will decrease its use, it will not make it fall as rapidly as the rise in cost of a leisure product, for example, the price of lawn gnomes.

Like most any concept in economics, elasticity of demand can be quantified and be illustrated in a formula:

Elasticity = % change in quantity demanded / % change in price

Plugging numbers into this formula we find out that an item is considered elastic if the result is greater than one. For example, if you owned a toy store and sold 100 dolls at \$10.00 each, but were forced to raise the price to \$15.00 and subsequently only could sell 50 dolls, the result would be:

% change in quantity demanded = 100 - 50 / 50 = 100%

% change in price = 15 - 10 / 10 = 50%

Elasticity = 100 / 50 = 2

So if the elasticity is two this means that the demand for dolls is quite elastic.

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