Question

What does it mean for the elasticity of demand to be ,7? How would you use this elasticity in decision making?

Answer 1

The demand elasticity of demand to be 7 means that the demand is highly responsive to the price. If the price of a changed by 1% the demand for the good will change by 7%. Generally the luxury goods have that high elasticity i.e. any increase in the price of the elasticity will change the demand for that goods immediately.

In decision making, if the good is so elastic then there should be no attempt made to tax these goods as it will completely change the demand and move it to zero. Any tax on such good will have to be borne by the supplier and the consumer will not pay any tax. Even the dead weight loss with such elastic demand is very high.