Detailed Summary
Elasticity of demand is a critical concept in economics that assesses the degree to which the quantity demanded of a good or service responds to changes in its price.
Key Points:
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Meaning: Elasticity of demand quantifies how sensitive consumers are to price changes for a given product.
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Types of Elastic Demand:
- Elastic Demand: This occurs when a small price change results in a significant change in the quantity demanded. For instance, luxury goods often exhibit elastic demand as consumers can easily reduce their purchases if prices rise.
- Inelastic Demand: In contrast, inelastic demand indicates that quantity demanded is relatively unresponsive to price changes. Necessities, such as basic food items or fuel, generally fall into this category as consumers need to purchase them regardless of price variations.
Understanding elasticity of demand is essential for businesses and policymakers as it influences pricing strategies and taxation decisions.