The Elasticity of Demand

Hi there!

Today I would like to explain another basic concept of economics the elasticity of demand. It is a concept in economics that measures the responsiveness of quantity demanded to a change in price. In other words, it measures how sensitive consumers are to changes in the price of a product or service.

It is an important concept because it helps businesses and policymakers understand how changes in price can affect consumer behaviour, and how they can adjust their pricing strategies accordingly.

The formula for calculating the elasticity of demand is:

Elasticity of Demand = (% change in quantity demanded) / (% change in price)

There are three types of demand elasticity: elastic, inelastic, and unitary. If the elasticity of demand is greater than 1, then the demand is considered elastic, which means that a small change in price will result in a large change in the quantity demanded.

If the elasticity of demand is less than 1, then the demand is considered inelastic, which means that a change in price will have little effect on the quantity demanded. Again, if the elasticity of demand is exactly 1, then the demand is considered unitary, which means that a change in price will result in an equivalent change in quantity demanded.

The concept of the "thinness" of a market refers to the extent to which there are close substitutes for a particular product or service. In a "thick" market, there are many close substitutes available, which means that consumers have more options and are more likely to switch to a different product or service if the price changes.

In a "thin" market, there are few close substitutes available, which means that consumers have fewer options and are less likely to switch to a different product or service if the price changes.

For example, if you are looking to purchase a specific type of rare antique, you may have limited options to choose from, making the market for that specific type of antique thin. In this case, if the price of the antique increases, you may still be willing to pay the higher price because there are few alternatives available.

On the other hand, if you are looking to purchase a common household item like a box of tissues, there are many close substitutes available, making the market for tissues thick. In this case, if the price of the tissues increases, you may switch to a different brand or type of tissue that is cheaper.

Thanks for reading my post and supporting me here. Hope that you have learned something useful from reading it.

Best Regards
@shahriar33

Reference book:
Mankiw, N. G. (2018). Principles of economics.