Understanding Elasticity of Demand
Elasticity of demand is a way to see how much the amount people want to buy changes when prices go up or down. Here’s why it’s important for understanding how the market works:
Price Sensitivity: When demand is elastic (which means elasticity is greater than 1), a small price increase can cause a big drop in the amount people buy. For instance, if the price of designer handbags goes up, many people might decide to stop buying them.
Necessities vs. Luxuries: On the other hand, if demand is inelastic (which means elasticity is less than 1), people will keep buying the product even if prices go up. An example of this is bread. Since people need bread, they will continue to buy it, no matter if the price increases.
Knowing about elasticity helps businesses set the right prices based on the economy!
Understanding Elasticity of Demand
Elasticity of demand is a way to see how much the amount people want to buy changes when prices go up or down. Here’s why it’s important for understanding how the market works:
Price Sensitivity: When demand is elastic (which means elasticity is greater than 1), a small price increase can cause a big drop in the amount people buy. For instance, if the price of designer handbags goes up, many people might decide to stop buying them.
Necessities vs. Luxuries: On the other hand, if demand is inelastic (which means elasticity is less than 1), people will keep buying the product even if prices go up. An example of this is bread. Since people need bread, they will continue to buy it, no matter if the price increases.
Knowing about elasticity helps businesses set the right prices based on the economy!