Compare percentage responses, not just the size of a change.
Elasticity measures how responsive one variable is to a change in another, other things equal. Price elasticity of demand (PED) compares the percentage change in quantity demanded with the percentage change in the good's own price. Price elasticity of supply (PES) uses quantity supplied instead. Percentage changes make the comparison independent of the units used. Elasticity is a property of a specified relationship, market, group and period; it is not itself a cause of a demand or supply shift.
- Responsiveness
- Elasticity measures how strongly one variable responds to another. It compares percentage changes, so losing 20 sales matters more in a market selling 100 units than one selling 1,000.
- PED and PES
- Price elasticity of demand (PED) measures buyers' quantity response; price elasticity of supply (PES) measures sellers' quantity response. Both respond to own price: the price of the good itself.
- Other things equal
- Ceteris paribus means holding other relevant influences unchanged. If price and advertising change together, the sales change alone cannot tell us the response to price.
Before calculating
Define the market
Name the product, buyers or sellers, location and period. A brand and a broad category can have different alternatives.
Identify the variable
Own price relates to PED/PES. H2 later adds income and another good's price as different causes.
Use consistent data
Quantities must cover comparable products and periods. Percentage changes, not raw unit changes, make elasticity unit-free.
| Measure | Responding quantity | Cause held in focus |
|---|---|---|
| PED | Quantity demanded | The good's own price |
| PES | Quantity supplied | The good's own price |
Worked example: Two markets lose the same number of sales
The price of the good rises by 10% in each market, with other influences on demand unchanged. Weekly quantity demanded falls from 100 to 80 in market A and from 1,000 to 980 in market B. Use each original quantity as the base: the value against which its change is measured.
- Both lose 20 units, but A loses 20/100 = 20% while B loses 20/1,000 = 2%. The same absolute fall means different responsiveness.
- Using the given 10% price rise, PED is -20%/10% = -2 in A and -2%/10% = -0.2 in B. A is more price-responsive over these changes.
- The negative sign means price and quantity demanded move in opposite directions. Magnitude means the size ignoring the minus sign: compare 2 with 0.2 to see which response is larger. A magnitude above 1 is called elastic; between 0 and 1 is inelastic. The next lesson explains these categories.
- Do not use the firms' sales changes to identify PED if income, tastes or other demand determinants also changed without being accounted for.
Watch out for this
A fall of 20 units always means the same elasticity.
Elasticity uses proportional changes. Identify the starting scale and the variable causing the response before calculating.
Check your understanding
Two markets both have a 5% own-price increase. Quantity demanded falls by 15% in A and 2% in B, other things equal. Which is more price-responsive?
- A, because its percentage quantity response is larger for the same percentage price change.
- B, because a smaller quantity response means greater elasticity.
- They have equal elasticity because their prices rose by the same percentage.