Elasticity is a measure of a variable's sensitivity to a change in another variable.

In
business andeconomics, elasticity refers the degree to which individuals, consumers or
producers change their demand or the amount supplied in response to price or income
changes.

What is 'Demand Elasticity'

Demand elasticity refers to how sensitive the demand for a good is to changes in other
economic variables, such as the prices and consumer income. Demand elasticity is
calculated by taking the percent change in quantity of a good demanded and dividing it
by a percent change in another economic variable. A higher demand elasticity for a
particular economic variable means that consumers are more responsive to changes in
this variable, such as price or income.

BREAKING DOWN 'Demand Elasticity'

Demand elasticity measures a change in demand for a good when another economic
factor changes. Demand elasticity helps firms model the potential change in demand
due to changes in price of the good, the effect of changes in prices of other goods and
many other important market factors. A grasp of demand elasticity guides firms toward
more optimal competitive behavior and allows them to make more precise forecasts of
their production needs. If the demand for a particular good is more elastic in response to
changes in other factors, companies must be more cautions with raising prices for their
goods.
Types of Demand Elasticities
One common type of demand elasticity is the price elasticity of demand, which is
calculated by dividing the percent change in quantity demanded of a good by the
percent change in its price. Firms collect data on price changes and how consumers
respond to such changes and later calibrate their prices accordingly to maximize their
profits. Another type of demand elasticity is cross-elasticity of demand, which is
calculated by taking the percent change in quantity demanded for a good and dividing it
by percent change of the price for another good. This type of elasticity indicates how
demand for a good reacts to price changes of other goods.

Interpretation and Example of Demand Elasticity

Demand elasticity is typically measured in absolute terms, meaning its sign is ignored. If
demand elasticity is greater than 1, it is called elastic, meaning it reacts proportionately
higher to changes in other economic factors. Inelastic demand means that the demand
elasticity is less than 1, and the demand reacts proportionately lower to changes in
another variable. When a change in demand is proportionately the same as that for
another variable, the demand elasticity is called unit elastic.

Suppose that a company calculated that the demand for soda product increases from
100 to 110 bottles as a result of the price decrease from $2 to $1.50 per bottle.
The price elasticity of demand is calculated by taking a 10% increase in demand (10
bottles change divided by initial demand of 100 bottles) and dividing it by a 25% price
decrease, producing a value of 0.4. This indicates that lowering soda prices will result in
a relatively small uptick in demand, because the price elasticity of demand for soda
is inelastic. Also, an increase in total revenue will be smaller in this case compared to
more elastic demand for soda.

Price elasticity of supply (PES or Es) is a measure used in economics to show the
responsiveness, or elasticity, of the quantity supplied of a good or service to a change in
its price.
The elasticity is represented in numerical form, and is defined as the percentage
change in the quantity supplied divided by the percentage change in price.
When the coefficient is less than one, the supply of the good can be described
as inelastic; when the coefficient is greater than one, the supply can be described
as elastic.[1] An elasticity of zero indicates that quantity supplied does not respond to a
price change: it is "fixed" in supply. Such goods often have no labor component or are
not produced, limiting the short run prospects of expansion. If the coefficient is exactly
one, the good is said to be unitary elastic.
The quantity of goods supplied can, in the short term, be different from the amount
produced, as manufacturers will have stocks which they can build up or run down.