ENGL 301 Assignment 1:3 Definitions of Elasticity
Introduction
The following definitions of “elasticity” are written to explain to the audience that does not
have an economic background and to increase their understanding about the economic
world. The three kinds of definitions are namely Parenthetical, Sentence and Expanded
definitions.
Parenthetical Definition
Managers often look at elasticity (consumers’ responsiveness to change in another
economic variable, such as price) to forecast market demand when they make pricing
decisions.
Sentence Definition
Elasticity is an economic concept that calculates the percentage change in demand for a
product to a percentage change in its price.
Expanded Definition
What is Elasticity?
Elasticity is a way to measure and predict the consumers’ demand to changes in an
economic variable. In this expanded definition, the focus will be the price elasticity of
demand. When price changes, there must be a subsequent change in demand. When
managers want to increase the price of a product, they have to first find out if the product has
an elastic, inelastic or unitary elastic price elasticity to determine if their pricing decision will
generate more or less revenue.
What are the three kinds of Elasticity?
Economically, the three kinds of elasticity are namely elastic, inelastic and unitary elastic.
When the percentage change in quantity demanded is greater than the percentage change
in price, it means that the consumer good has an elastic demand.
When the percentage change in quantity demanded is smaller than the percentage change
in price, it means that the consumer good has an inelastic demand.
When the percentage change in quantity demanded is equal to the percentage change in
price, it means that the consumer good has an unitary elastic demand.
How to find out price elasticity from a diagram?
Figure 1. Three kinds of elasticity labeled along a demand curve. Adapted from Principles of
Microeconomics (245), by L. Ritterburg & T. Tregarthen, 2011, Retrieved January 25, 2016,
from http://ocw.mit.edu/ans7870/14/14.01SC/MIT14_01SCF11_rttext.pdf
Consumer’s price elasticity can be demonstrated in a single demand curve. In the diagram,
when a consumer’s preference is indicated as point A or point B, it implies the consumer has
an elastic demand. However, if a consumer’s preference is labeled as point E or point F, the
consumer has an inelastic demand.
How to calculate price elasticity of demand?
To obtain price elasticity of a consumer good, we divide the percentage change in demand
for the good by the percentage change in its price.
How do we make use of elasticity?
For instance, when the price of water increases by 10% but the demand for water decreases
by 5% only, thus water has an inelastic demand. In other words, the increase in price of
water will lead to a less significant drop in sales. Therefore, managers will increase the price
of water to boost revenue.
Perloff, J. (2008). Microeconomics: Theory and Applications with Calculus. California, CA:
Prentice Hall
Pindyck, R. & Rubinfeld, D. (2012). Microeconomics (8th Edition). Toronto, ON: Pearson
Ritterberg, L. & Tregarthen, T. (2011). Principles of Economics. Retrieved from
http://ocw.mit.edu/ans7870/14/14.01SC/MIT14_01SCF11_rttext.pdf