Elasticity Coefficient - Explained
What is Elasticity Coefficient?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is an Elasticity Coefficient?
Price elasticity or elasticity coefficient is an economic term that shows the percentage change in quantity demanded due to a change in the price of goods and services.
Back to: RESEARCH, ANALYSIS, & DECISION SCIENCE
How is Elasticity Coefficient Used?
Price elasticity is simply percentage change in quantity demanded divided by percentage change in price of goods and service.
The formula for calculating price elasticity is as following; Ep= % change in quantity demanded(Q) / % change in price(P)
Example: Price Elasticity Where Ep represents elasticity coefficient, %Q shows change in quantity demanded, and %P represents change in price of particular goods and services.
Lets assume the price of oil increases by 60%, and the quantity demanded decreases by 20%, the elasticity coefficient will be; Ep = % Quantity (20%) / % Price (60%) = 0.33
How to Interpret the Elasticity Coefficient
1) If Ep > 1, demand is elastic. This means that a slight variation in price can produce greater change in quantity demanded. Therefore, hike in prices will negatively affect revenue, as the sales will drop with increase in price and vice versa.
2) If Ep < 1, demand is inelastic for the particular good or service. It means quantity demanded is not affected significantly from variation in price of goods and services. In simple words, there is less change in quantity demanded due to price fluctuation.
3) If Ep = 1, demand for goods is unit elastic. It means quantity demanded is fluctuated in proportion to price of goods and services. Thus, price changes have no effects on revenue of the firm.