Introduction to elasticity of demand

Let me ask you ‘n question:  If a business wants to generate more revenue should it increase the price of its products or decrease its price of its products?

What do you think?

Well – It depends.  If Eskom wants to generate more revenue it will increase the price of electricity.  If South African Airlines quickly wants to generate more revenue it will reduce ticket prices.  So... Which one is correct?  Well, they both are.  It all depends on the sensitivity of buyers.  How sensitive will buyers be to a change in prices. 

Elasticity is about the sensitivity that buyers and sellers have for changes in price.

Elasticity of demand is defined as the percentage change in the quantity, relative to the percentage that the price of that product has changed.

 

There are four types of elasticity’s:

1) Elasticity of Demand = E_d

2) Elasticity of Supply = E_s

3) Income Elasticity = E_y

4) Cross Price Elasticity = E_xp

If a buyer is very sensitive to a change in price it means that the buyer’s sensitivity to price is relative elastic.  If a buyer is not very sensitive to a change in price it means the buyer the buyer’s price sensitivity is relative inelastic. 

When you calculate the calculations you always interpret the values.  (See flow diagram below). 

Check out the video of elasticities under video's. 

Next week: Examples of calculations