What is meant by elasticity of demand?

In one line

The rule

Elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price or other factors.

The formula is: E_d = % Change in Quantity Demanded / % Change in Price Where:

• E_d = Elasticity of demand
• % Change in Quantity Demanded = (New quantity − Old quantity) / Old quantity × 100
• % Change in Price = (New price − Old price) / Old price × 100

Let's understand it simply

Imagine you love samosas at your school canteen. If the price goes up from ₹10 to ₹20, will you still buy the same number? Most students will buy fewer. Elasticity of demand tells us how much less you and others will buy when the price changes. If you stop buying samosas as soon as the price goes up a little, your demand is very elastic (very sensitive to price). If you still buy almost the same number, your demand is inelastic (not sensitive to price).

How it works

1. First, note the old price and quantity (before the change).
2. Next, note the new price and quantity (after the change).
3. Find the change in quantity: New quantity − Old quantity.
4. Find the change in price: New price − Old price.
5. Calculate the percentage change for both quantity and price.
6. Divide the percentage change in quantity by the percentage change in price to get elasticity.

The story behind it

The idea of elasticity in economics was first explained by Alfred Marshall, a famous British economist, in the late 1800s. He wanted to understand why people buy more or less of something when prices change. Marshall used the word "elastic" because, like a rubber band, demand can stretch (change a lot) or not stretch much (change a little) when prices move.

Where you see it in real life

• Vegetables in the market: If onion prices double during monsoon, most families buy less or switch to other vegetables. This shows elastic demand.
• Petrol for bikes: Even if petrol prices rise, people still need to travel to work or school, so they buy almost the same amount. This is inelastic demand.
• Mobile data packs: If the price of data drops, students may buy bigger packs or use more internet. Demand increases a lot, showing elastic demand.
• Salt in the kitchen: If salt price goes up, families still buy the same amount because it is essential. Demand is inelastic.

Why it matters

• Helps shopkeepers set prices: If demand is elastic, raising prices may reduce sales a lot.
• Government tax decisions: Taxes on inelastic goods (like petrol) bring more money because people cannot easily stop buying them.
• Business planning: Companies use elasticity to predict how sales will change with price changes.
• Exam questions: Many economics questions in board exams ask about elasticity, its calculation, and examples.

Worked example

Given: Price of chocolate bar increases from ₹10 to ₹15
        Quantity demanded decreases from 100 to 50 bars
Step 1: Find % change in quantity demanded: (50 - 100) / 100 × 100 = -50%
Step 2: Find % change in price: (15 - 10) / 10 × 100 = 50%
Step 3: Use the formula: E_d = -50% / 50% = -1
Step 4: Ignore the minus sign (we care about the size): Elasticity = 1 (unit elastic)

Common mistakes

• Forgetting to use percentage change: Always use percentage, not just the difference in numbers.
• Ignoring the direction: Elasticity is usually written as a positive number, even though the formula gives a negative sign.
• Mixing up elastic and inelastic: Elastic means demand changes a lot; inelastic means it changes very little.

Remember it

Elasticity of demand = How much demand stretches when price changes.