Calculating Elasticity and Percentage Changes

Read this article on how to estimate elasticity. Make sure to answer the "Try It" questions.

Inelastic, Elastic, and Unitary Demand

So what does the number -0.7 tell us about the elasticity of demand? The negative sign reflects the law of demand: at a higher price, the quantity demanded for cigarettes declines. All price elasticities of demand have a negative sign, so it's easiest to think about elasticity in absolute value, ignoring the negative sign. The fact that the result is less than one is more important than the negative sign. It tells us that the size of the quantity change is less than the size of the price change (i.e. the numerator in the elasticity formula is less than the denominator). This tells us that it would take a relatively large price change in order to cause a relatively small change in quantity demanded. In other words, consumer responsiveness to a change in price is relatively small. Therefore, when the elasticity is less than 1, we say that demand is inelastic.

The data above indicate that the demand for cigarettes by teenagers, minority, low income and casual smokers is relatively inelastic. Addicted adult smokers, though, are even less sensitive to changes in the price – most are willing to pay whatever it takes to support their smoking habit. We can say that their demand is even more inelastic than low income or casual smokers.

Different products have different price elasticities of demand. If the absolute value of the elasticity of some product is greater than one, it means that the change in the quantity demanded is greater than the change in price. This indicates a larger reaction to price change, which we describe as elastic. If the elasticity is equal to one, it means that the change in the quantity demanded is exactly equal to the change in price, so the demand response is exactly proportional to the change in price. We call this unitary elasticity, because unitary means one.