The elasticity of demand is an economic measurement used to calculate the ratio between percentage change in quantity demanded and the percentage change in price. Elasticities determine how much or how little the amount of a good that is sold is dependent on price. Demand is inelastic if price increases have a minimal effect on the amount of goods purchased. If demand is elastic, an increase in price will severely decrease the number of sales.
Instructions
1. Determine the quantity of goods that were sold at the original price. For example, if the price of a hamburger increased from $1.50 to $1.70, check the records to find out how many hamburgers were sold when the price was $1.50. For this example, we'll say that 200 burgers were sold.
2. Determine the quantity of goods that were sold at the increased price. Continuing the example, check the records to determine how many hamburgers were sold at $1.70. For this example, we'll say that 180 burgers were sold.
3. Plug the values for initial price (Po), new price (Pn), initial quantity (Qo) and new quantity (Qn) into the following equation: Elasticity = (Qn - Qo) / ( (Qn + Qo) / 2) ) / (Pn - Po) / ( (Pn + Po) / 2) ). Take the absolute value of the value you get.
In this example, using 200 for Qo, 180 for Qn, 1.50 for Po, and 1.70 for Pn, you get -.84, whose absolute value is .84. Because this number is less than one, it means that the percentage change in the quantity is less than the percentage change in the price, making demand inelastic.
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