Question

9. Elasticity of Demand is designed to show sensitivity of the demand curve. Explain how it works and why it can be used as a cross industry comparative tool. What does it mean if an elasticity is greater than 1?

Answer 1

The price elasticity of demand curve shows the percent change in quantity demanded with respect to percent change in price of the good. Thus, it shows how sensitive the demand of the good is to the change in the other economic variables such as price of goods, income of the consumer, price of related goods etc. The responsiveness of demand to the change in other economic variables. It cannot be used as a cross comparative tool because it does not have a common unit of measurement. For industry comparison of a measure, it has to be in the same unit across all the industries which is not the case here. Thus, industry comparison is not possible in this case.

If the elasticity is greater than 1, then it means that demand of the good is elastic which means that the rate at which quantity demanded of the good changes is more than the rate at which there is change in other economic variables. Thus quantity demanded is more responsiveness which is mainly the case in luxury goods etc.