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# elasticity

Fin
the measure of the sensitivity of one variable to another.
EXAMPLE
In practical terms, elasticity indicates the degree to which consumers respond to changes in price. It is obviously important for companies to consider such relationships when contemplating changes in price, demand, and supply.
Demand elasticity measures how much the quantity demanded by a customer changes when the price of a product or service is increased or lowered. This measurement helps companies to find out whether demand will remain constant despite price changes. Supply elasticity measure the impact on supply when a price is changed.
The general formula for elasticity is:
Elasticity = % change in x/% change in y
In theory, x and y can be any variable. However, the most common application measures price and demand. If the price of a product is increased from \$20 to \$25, or 25%, and demand in turn falls from 6,000 to 3,000, elasticity would be calculated as:
−50%/25% = – 2
A value greater than 1 means that demand is strongly sensitive to price, while a value of less than 1 means that demand is not pricesensitive.

The ultimate business dictionary. 2015.

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