Elasticity

Elasticity is a measure of responsiveness of customers. It measures how much of something changes when there is a change in one of the factors that determine it.

Elasticity of demand
It measures how much of the quantity demanded changes when the price of that product changes. The formula for price elasticity is PED= % ΔQd / % ΔP
This basically says that the price elasticity is the percent change of the quantity demanded divided by the percent change in the price.

If PED =  ∞ , it is perfectly elastic  

If PED=0 , it is perfectly inelastic

               vs.

If 1< PED < ∞  , it is elastic and the customers respond              

to the price change a lot.                                                       

If 0< PED< 1, it is inelastic and customers  don't respond to the price change that much.

A real world example of elasticity:

In the ice-cream shop "Ice-world" there are trying to increase the revenue. The original price of one scoop of ice-cream is $0.80. The quantity demanded of ice-cream at this price is 120. The manager of "Ice-world" decided to raise the price, so now the price will be $1.10. The quantity demanded at this price will drop to 90. 

% ΔQd = (120-90)/120 * 100 = 30/120 * 100 = 25%

 % ΔP = (1.10-0.80)/0.80 * 100 = 0.30/0.80 * 100 = 37.5%

PED= % ΔQd / % ΔP

PED= 25 % / 37.5 %

PED= 0.66    -----> it is inelastic because it is less than 1

Original revenue :  0.80 * 120 = $96

New revenue : 1.10 * 90 = $99   ----> "Ice-world" is going to make $3 more after raising the price

This means that it was beneficial to raise the price because "Ice-world" is going to make $3 more than before. We found out that the price elasticity of this particular example is inelastic which means that customers do not respond to the price change that much.