CA Foundation Exam June 2023 » CA Foundation Study Material » Business Economics » Elasticity of Demand: What Is It and How to Use It in Business

# Elasticity of Demand: What Is It and How to Use It in Business

In business, it’s important to understand how different factors can affect demand for your products and services. The elasticity of demand is one of the most important concepts in economics, and it measures how sensitive demand is to changes in price and other factors. In this blog post, we’ll discuss what elasticity of demand is and how you can use it to make sound business decisions. We’ll also look at some examples so you can see how elasticity affects real-world businesses.

## What is the elasticity of demand?

The elasticity of demand is a standard for measuring how sensitive the quantity in demand of a good or service is to price changes. Elasticity can be positive, negative, or zero. Let’s take a closer look at what each type means and how it affects your business decisions.

### What is the price elasticity of demand?

The elasticity of demand measures how the demand for the quantity of a product changes when there’s a change in price. Elasticity can be described as elastic, inelastic or unitary. Elasticity is said to be elastic when a percentage change in price results in an even higher percentage change.

It is a measure of how responsive the quantity demanded of a good or service is to changes in its price. The higher the price elasticity of demand, the more responsive the quantity demanded is to changes in price. Conversely, the lower the price elasticity of demand, the less responsive demand in quantity is to changes in price.

### What is cross elasticity of demand?

Cross elasticity of demand is a measure of the response for the demand for one good to changes in the price of another good, ceteris paribus. The elasticity of demand measures the sensitiveness of quantity demanded to the price change. The Elasticity of cross demand measures the response of the quantity a customer demands for a good or service to a change in the price of another good or service. The elasticity of demand measures the approachability of quantity demanded to a shift in price. It is calculated by dividing the percentage difference in the demand of quantity by the Elasticity of cross demand measures the responsiveness of demand in quantity for a product to a price shift.

### The elasticity of Demand values

The elasticity of Demand values are often used to categorise Elasticity into different groupings:

Elastic (greater than one): Goods for which Elasticity of Demand is greater than one are called Elastic. This means that the change in percentage of quantity demanded is larger than the change in percentage of the price.

Elastic goods are products for which a small price change causes a large quantity change. The elasticity of demand greater than one means that price increases have reduced revenue,

Elastic (lesser than one): Elasticity of Demand less than one means that price decreases have reduced revenue. Elastic goods are often products with close substitutes.

### Impact of price elasticity of demand on Business

Price elasticity of demand has a great impact on businesses. When it is high, it means that consumers are very sensitive to changes in prices and will buy more of the goods when the price decreases and less when the price increases. This can be a major problem for businesses because they may not be able to raise or lower prices without losing customers.

On the other hand, if Elasticity is low, then it means that consumers are not very sensitive to price changes and will continue buying the product even when prices increase or decrease. This can be a major benefit for businesses because they can raise Elasticity of cross demand measures the responsiveness of quantity demanded for a good or service to a change in the price.

### Closing Statement

The elasticity of demand is an important concept to understand for any business owner. By knowing how and when to adjust prices, you can ensure that your products are always in high demand and that you’re making the most profit possible. It’s a tricky balance, but with a little practice and knowledge of the different types of elasticity, you should be able to stay ahead of the competition. We hope this article has helped give you a better understanding of what elasticity is and how it applies to your business.