Elasticity of demand is a significant modification to the concept of demand. Demand can be categorised as elastic, inelastic, or unitary.

A demand that is elastic experiences a significant shift in quantity demanded as a result of a price adjustment. When the amount sought changes little as a result of a price adjustment, the demand is said to be inelastic.

The following equation is used to determine elasticity of demand:

(Q1 – Q2) / (Q1 + Q2)    / 
(P1 – P2) / (P1 + P2)

                                       Percentage change in demand

Elasticity of demand =   ———————————————

                                      Percentage change in price

                                           Δ Qd

                                  Ed = ———–

                                              ΔP

Demand is elastic if the formula yields an absolute value greater than 1. To put it another way, quantity varies more quickly than price. The demand is inelastic if the value is less than 1. So, quantity changes more slowly than price. The elasticity of demand is unitary if the value is 1. In other words, changes in quantity follow those in price.

Elastic Demand

Figure 1 displays elasticity of demand. Be aware that a price change causes the quantity demanded to fluctuate significantly. Consumer durables are an example of a product with elastic demand. Like a washing machine or a car, these are infrequently acquired things that can be put off if the price goes up. For instance, car discounts have been quite effective at increasing car sales by lowering the price.

The elasticity of demand is impacted by close replacements for a good. Consumers will rapidly convert to the alternative product if the price of your product rises or the price of the alternative product falls if another product can be easily substituted for it. For instance, all meat items, including beef, pork, and chicken. Recent years have seen a decrease in the price of poultry, which has led to a rise in the consumption of poultry at the expense of beef and pork. Therefore, the demand for products with near substitutes is often elastic.

Inelastic Demand

In Figure 2, Inelastic demand is depicted. Be aware that a change in price only has a marginal impact on the quantity demanded. In other words, changes in price do not significantly affect the quantity demanded. This includes basics like food and fuel as examples. If food prices increase, consumers might change the kinds of food they buy, but they won’t cut back on their purchases. Additionally, even if fuel costs increase, customers’ driving habits won’t change significantly. This does not imply that there is an inelastic demand for a specific producer. For instance, a hike in petrol prices across the board might not have a substantial impact on sales. Nevertheless, the sales of a particular station will be greatly impacted by a price increase.

Unitary Elasticity

Demand is unitarily elastic if the elasticity coefficient is one, as depicted in Figure 3. For instance, one is obtained by dividing a quantity change of 12% by a price change of 12%. This implies that for every 1% change in price, there is a 1% change in quantity.