Define elasticity of demand. Give it’s relation to revenue.
Answers
In economics, the demand elasticity (elasticity of demand) refers to how sensitive the demand for a good is to changes in other economic variables, such as prices and consumer income. Demand elasticity is calculated as the percent change in the quantity demanded divided by a percent change in another economic variable. A higher demand elasticity for an economic variable means that consumers are more responsive to changes in this variable.
Suppose that a company calculated that the demand for a soda product increases from 100 to 110 bottles because of the price decrease from $2 to $1.50 per bottle. The price elasticity of demand is calculated as the percentage change in quantity demanded (110-100/100= 10%) divided by a percentage change in price ($2-$1.50/$2); therefore, the price elasticity of demand for this example is .4. Since the result is less than 1, it is inelastic; the change in price has little effect on the quantity demanded.