Interpreting Elasticity of Demand

Elasticity of demand refers to how responsive consumers are to changes in the price of a product.
Price elasticity of demand (PED) is calculated by dividing the percentage change in quantity demanded by the percentage change in price.
If the PED is greater than 1, demand is said to be elastic - a change in price results in a larger percentage change in demand, hence, buyers are more responsive to price changes.
For PED less than 1, demand is deemed inelastic - buyers are not greatly affected by price changes. They will continue to buy similar quantities despite price fluctuations.
When the PED equals 1, demand is unit elastic - a percentage change in price matches the percentage change in demand.
Perfectly elastic demand occurs when any increase in price causes demand to drop to zero, while perfectly inelastic demand occurs when demand remains constant regardless of changes in price.
Products and services considered as necessities typically have inelastic demand, as consumers will continue to buy them despite price alterations.
Luxury items and those with close substitutes tend to have elastic demand, since consumers are able to change their buying habits readily in response to price changes.
Understanding the elasticity of demand is key for businesses when considering price changes. High elasticity indicates that price changes could significantly impact revenue while low elasticity suggests that price changes will not greatly influence consumer behaviour.
Short-term and long-term elasticity can differ. In short-term, consumers may not easily change their buying behaviour due to price changes, thus demand appears inelastic. However, given enough time, customers could find alternatives or adjust their habits making demand more elastic.
The availability of substitutes, the degree of necessity, the cost relative to income and timeframe are all factors that can influence the elasticity of a product or service.
It’s important that potential inaccuracies in measuring percentage changes and the assumption that other things remain equal (ceteris paribus) when calculating elasticity are considered.