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In: Economics

What does an elasticity of > 1 or < 1 imply both with elasticity of demand...

What does an elasticity of > 1 or < 1 imply both with elasticity of demand or supply?

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Expert Solution

Elasticity = (% change in quantity / % change in price)

If the elasticity is greater than or equal to 1, the curve is considered to be high elastic. If it is less than one, the curve is said to be less elastic.

Elasticity of demand (also called price elasticity of demand). The price elasticity of demand quantifies the effect of a change in its own price on the quantity demanded.

Formally, it is defined as the ratio of Percentage Change in Quantity Demanded to a Percentage Change in its own Price.

Elasticity of demand (ed) = %Change in Quantity Demaded/ %Change in Price.

Implication of ed > 1

  • A good or service is considered highly elastic if even a slight change in price leads to a sharp change in the quantity demanded (Flatter Demand Curve). Usually the kinds of products (with ed >1) are readily available in the market and a person may not necessarily need them in his or her daily life, or if there are good substitutes. For example, if the price of Coke rises, people may readily switch over to Pepsi.

Implication of ed<1

  • A good or service whose elasticity<1 is one in which large changes in price produce only modest changes in the quantity demanded (Steeper Demand Curve). These goods tend to be things that are more of a necessity to the consumer in his or her daily life, such as gasoline.

Elasticity of Supply (also called Price Elasticity of Supply).

The Price Elasticity of Supply quantifies the effect of a change in its own price on the quantity supplied.

Formally it is defined as the ratio of the Percentage Change in Quantity Supplied to a Percentage Change in Price.

Elasticity of Supply (es) = %Change in Quantity Supplied / %Change in Price.

Implication of es >1

  • If a change in price results in a big change in the amount supplied, the supply curve appears flatter and is considered elastic. Elasticity in this case would be greater than 1.

Implication of es<1

  • If a big change in price only results in a minor change in the quantity supplied, the supply curve is steeper and its elasticity would be less than one.


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