Elasticity tells how strongly demand responds when a factor changes (price, income, or price of related goods). In business, elasticity helps answer questions like:
Elasticity is often asked as: definition + formula + types + factors + business uses.
Elasticity of demand is the degree of responsiveness of quantity demanded to a change in one of its determinants.
General idea:
This measures sensitivity, not absolute change.
Managers use elasticity to:
Elasticity is the base for revenue management.
Price elasticity of demand (PED) measures responsiveness of quantity demanded to change in price.
Formula (basic):
Because price and quantity demanded move inversely, PED is often negative. In exam writing, many teachers use absolute value and write .
Two common forms:
Based on absolute value of PED:
Exam tip: draw 2–3 small demand curves if asked.
In exams, you can write percentage method + total outlay method clearly; point/arc are added advantage.
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Degrees/types of price elasticity (based on |Ep|):
These categories help in pricing decisions.
Income elasticity (Ey) = %ΔQ / %ΔY measures how demand changes with income. Classification:
It helps firms position products for different income groups.
Managerial economics is a stream of management studies which emphasises solving business problems and decision-making by applying the theories and principles of microeconomics and macroeconomics. It is a specialised stream dealing with the organisation's internal issues by using various economic theories.
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Elasticity tells how strongly demand responds when a factor changes (price, income, or price of related goods). In business, elasticity helps answer questions like:
Elasticity is often asked as: definition + formula + types + factors + business uses.
Elasticity of demand is the degree of responsiveness of quantity demanded to a change in one of its determinants.
General idea:
This measures sensitivity, not absolute change.
Managers use elasticity to:
Elasticity is the base for revenue management.
Price elasticity of demand (PED) measures responsiveness of quantity demanded to change in price.
Formula (basic):
Because price and quantity demanded move inversely, PED is often negative. In exam writing, many teachers use absolute value and write .
Two common forms:
Based on absolute value of PED:
Exam tip: draw 2–3 small demand curves if asked.
In exams, you can write percentage method + total outlay method clearly; point/arc are added advantage.
Income elasticity measures responsiveness of demand to change in income.
Formula:
Interpretation:
Business use: helps decide product positioning (premium vs basic).
Cross elasticity measures responsiveness of demand for one good to change in price of another good.
Formula:
Interpretation:
Business use: understand competitor impact and bundling opportunities.
Main factors (write as points):
Total revenue (TR) = Price × Quantity.
Key relationship:
This is a very common question.
If price falls by 10% and quantity demanded rises by 20%:
If income rises by 5% and demand rises by 2%:
If price of coffee rises by 10% and demand for tea rises by 5%:
If price is reduced and total revenue increases, demand is elastic.
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Price elasticity of demand (PED) measures how quantity demanded responds to a change in price. Formula: Ep = %ΔQ / %ΔP (usually negative due to inverse relation; often taken in absolute value).
Degrees of PED: perfectly inelastic (0), relatively inelastic (<1), unitary (=1), relatively elastic (>1), perfectly elastic (∞).
Measurement methods:
Elasticity and total revenue relationship (TR test):
Managerial use: firms with elastic demand should be careful in raising prices; firms with inelastic demand can increase price to raise revenue.