Price Elasticity

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Last updated 11:42 AM on 5/21/26
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7 Terms

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Elasticity

Measures sensitivity of demand to price changes. It measures how responsive the quantity demanded of a good is to a change in its price.

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Formula

= Percentage change in quantity demanded / percentage change in price

Typically a negative value due to the inverse relationship between price and demand.

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When is demand elastic?

Greater than 1 in absolute value.

Consumers are highly sensitive to price changes and demand changes a lot.

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When is demand inelastic?

Less than 1.

Indicates low sensitivity and demand barely changes.

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If demand is inelastic…

Raise prices

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If demand is elastic

Lowering price may increase revenue

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What drives elasticity?

  • Substitutes: the more alternatives, the more elastic.

  • Brand strength: the stronger the brand the less elastic it will be.

  • Time horizon: long term = more elastic