The Elasticity of Demand Have you ever wondered how business set prices for their goods and services? One of the most important ideas in marketing is the elasticity of demand, or the response of consumers to a change in price. Consumers respond very differently to a change in price of a staple item, such as bread, as compared to a luxury item such as jewellery. A family would probably still buy the same quantity of bread if the price increased by 20%. This is called inelastic demand. If the price of a gold chain, however, were increased by 20%, it is likely sales would decrease 40% or more. This is called elastic demand. Mathematically, elasticity is dened as the relative (percentage) change in the number demanded (:1) divided by the relative (percentage) change in the price (Alf): & _ _ i E ' A_p P For example, if a store increased the price of a CD from $17.99 to $19.99 and the number sold per week went from 120 to 80, the elasticity would be (so 120) _ 120 (19.99 17.99) 17.99 E = = 3.00 The elasticity of 3.00 means that the change in demand is three times as large, in percentage terms, as the change in price. The CD5 have an elastic demand because a small change in price can cause a large change in demand. In general, goods or services with elasticities greater than one (E > 1) are considered elastic (e.g., new cars), and those with elasticities less than one (E