Term of the Day - 14 May 2024

Today’s Term is “Demand Elasticity”.

Demand elasticity refers to the degree of responsiveness of quantity demanded to changes in price, income, or other factors affecting consumer behaviour. It measures how sensitive consumers are to changes in these variables and helps businesses understand the dynamics of demand for their products or services.

Key aspects of demand elasticity include:

1. Price Elasticity of Demand: This is the most commonly used measure of demand elasticity, and it quantifies the percentage change in quantity demanded in response to a one percent change in price. If demand is elastic, a small change in price will result in a relatively large change in quantity demanded, indicating a high degree of sensitivity to price changes. Conversely, if demand is inelastic, changes in price have a relatively small effect on quantity demanded.

2. Income Elasticity of Demand: This measures the responsiveness of quantity demanded to changes in consumer income. A positive income elasticity indicates that demand for a product increases as consumer income rises, while a negative income elasticity suggests that demand decreases as income increases.

3. Cross-Price Elasticity of Demand: This measures the responsiveness of quantity demanded for one product to changes in the price of another product. It helps businesses understand the degree of substitution or complementarity between different goods or services.

Overall, demand elasticity is a crucial concept in economics and business decision-making, as it helps companies set prices, forecast demand, and optimize their marketing strategies based on consumer behaviour.