EDUCBA Logo

EDUCBA

MENUMENU
  • Explore
    • EDUCBA Pro
    • PRO Bundles
    • Featured Skills
    • New & Trending
    • Fresh Entries
    • Finance
    • Data Science
    • Programming and Dev
    • Excel
    • Marketing
    • HR
    • PDP
    • VFX and Design
    • Project Management
    • Exam Prep
    • All Courses
  • Blog
  • Enterprise
  • Free Courses
  • Log in
  • Sign Up
Home Finance Finance Resources Finance Formula Elasticity Formula
 

Elasticity Formula

Madhuri Thakur
Article byMadhuri Thakur

Updated July 25, 2023

Elasticity Formula

 

 

Elasticity Formula (Table of Contents)
  • Formula
  • Examples

What is the Elasticity Formula?

The term “elasticity formula” refers to the measurement of relative change in an economic factor owing to the relative change in another economic factor.

In other words, it helps in measuring the influence of variation in the driving economic factor (e.g.: income and price) on the dependent economic factor (e.g.: demand). Two of the major instances of elasticity formula are 1) Income elasticity of demand and 1) Price elasticity of demand

Watch our Demo Courses and Videos

Valuation, Hadoop, Excel, Mobile Apps, Web Development & many more.

The formula for elasticity can be expressed as a proportional change in the dependent economic factor by a proportional change in the driving economic factor.

Formula

Elasticity = % Change in Dependent Economic Factor / % Change in Driving Economic Factor

In the same line, the income elasticity of demand formula is expressed as % change in demand by % change in real income which is mathematically represented as,

Income Elasticity of Demand = % Change in Demand / % Change in Real Income

Similarly, the Price Elasticity of Demand Formula Is Expressed as % Change in Demand by % Change in Price Which Is Mathematically Represented as,

Price Elasticity of Demand = % Change in Demand / % Change in Real Income

Example of Elasticity Formula (With Excel Template)

Let’s take an example to understand the calculation of Elasticity in a better manner.

You can download this Elasticity Formula Excel Template here – Elasticity Formula Excel Template

Elasticity Formula – Example #1

Let us take the example of the impact of change in per capita income on the per capita demand for rice in order to illustrate the concept of income elasticity of demand. If the increase in per capita income from $3,000 to $3,200 resulting in an increase in per capita consumption of rice from 58 kg to 61 kg, then determine the income elasticity of demand.

Impact of Change in Per Capita Income

Solution:

Change in Demand  is Calculated is calculated using the formula given below

Change in Demand = Final Demand – Initial Demand

Elasticity Formula-1.2

  • Change in demand = 61 kg – 58 kg
  • Change in demand = 3 kg

Average Demand is Calculated is calculated using the formula given below

Average Demand = (Final Demand + Initial Demand) / 2

Elasticity Formula-1.3

  • Average Demand = (61 kg + 58 kg) / 2
  • Average Demand = 59.5 kg

% Change in Demand can be calculated is calculated using the formula given below

% Change in Demand = Change in Demand / Average Demand

Elasticity Formula-1.4

  • % Change in Demand = 3 kg / 59.5 kg
  • % Change in Demand = 5.04%

Change in Income can be calculated is calculated using the formula given below

Change in Income = Final Income – Initial Income

Elasticity Formula-1.5

  • Change in Income = $3,200 – $3,000
  • Change in Income = $200.00

Average Income can be calculated is calculated using the formula given below

Average Income = (Final Income + Initial Income) / 2

Elasticity Formula-1.6

  • Average Income = ($3,200  + $3,000) / 2
  • Average Income = $3,100

% Change in Income can be calculated is calculated using the formula given below

% Change in Income = Change in Income / Average Income

Elasticity Formula-1.7

  •  % Change in Income = $200 / $3,100
  •  % Change in Income = 6.45%

Income Elasticity of Demand is calculated using the formula given below

Income Elasticity of Demand = % Change in Demand / % Change in Real Income

Income Elasticity of Demand

  • Income Elasticity of Demand = 5.04% / 6.45%
  • Income Elasticity of Demand = 0.78

Elasticity Formula – Example #2

Now, let us take the example of influence price on the sale of a certain soft drink in order to illustrate the concept of price elasticity of demand. If the company is able to increase its monthly sales from 57,000 bottles to 59,000 bottles simply by reducing the price from $1.50 per bottle to $1.48 per bottle, then determine the price elasticity of demand.

Example of Influence Price

Solution:

Change in Demand  is Calculated is calculated using the formula given below

Change in Demand = Final Demand – Initial Demand

Elasticity Formula-2.2

  • Change in Demand = 59,000 – 57,000
  • Change in Demand = 2,000

Average Demand is Calculated is calculated using the formula given below

Average Demand = (Final Demand + Initial Demand) / 2

Elasticity Formula-2.3

  • Average Demand = (59,000 + 57,000) / 2
  • Average Demand = 58,000

% Change in Demand can be calculated is calculated using the formula given below

% Change in Demand  = Change in Demand / Average Demand

Elasticity Formula-2.4

  • % Change in Demand = 2,000 / 58,000
  • % Change in Demand = 3.45%

Change in Price can be calculated is calculated using the formula given below

Change in Price = Final Price – Initial Price

Change in Price

  • Change in Price = $1.48 – $1.50
  • Change in Price = -$0.02

Average Price can be calculated is calculated using the formula given below

Average Price = (Final price + Initial price) / 2

Average Price

  • Average Price = ($1.48  + $1.50) / 2
  • Average Price = $1.49

% Change in Price can be calculated is calculated using the formula given below

% Change in Price = Change in Price / Average Price

% Change in Price

  • % Change in Price = -$0.02 / $1.49
  • % Change in Price = -1.34%

Price Elasticity of Demand is calculated using the formula given below

Price Elasticity of Demand = % Change in Demand / % Change in Real Income

Price Elasticity of Demand

  • Price Elasticity of Demand = 3.44% / (-1.34%)
  • Price Elasticity of Demand = –2.57

Explanation

The formula for Elasticity can be computed by using the following steps:

Step 1: Firstly, determine the change in the dependent economic variable over the given period. Then, compute the % change in the dependent variable by dividing the change in the dependent economic factor by its average value over the period.

% Change in Dependent Economic Factor = Change in Dependent Economic Factor / Average Value of Dependent Economic Factor

Step 2: Next, determine the change in the independent or driving economic factor over the period. Then, compute the % change in the driving variable by dividing the change in the driving economic factor by its average value over the period.

% Change in Driving Economic Factor = Change in Driving Economic Factor / Average Value of Driving Economic Factor

Step 3: Finally, the formula for elasticity can be derived by dividing the % change independent economic factor (step 1) by the % change in driving economic factor (step 2) as shown below.

Elasticity = % Change in Dependent Economic Factor / % Change in Driving Economic Factor

Relevance and Use of Elasticity Formula

The concept of elasticity primarily used in building a business strategy intended for maneuvering demand. In fact, it considered being fundamental in deciphering the secrets of supply and demand in a market. Some of the common applications of elasticity include:

  • Effect of the price change on revenue
  • Analysis of the impact of advertisement on consumer demand
  • Analysis of incidence of the tax burden

Recommended Articles

This is a guide to Elasticity Formula. Here we discuss how to calculate the Elasticity Formula along with practical examples. We also provide a downloadable excel template. You may also look at the following articles to learn more –

  1. Formula of Levered Beta
  2. How to Calculate Net Cash Flow
  3. Example of Moving Average
  4. Calculation of Convexity

Primary Sidebar

Footer

Follow us!
  • EDUCBA FacebookEDUCBA TwitterEDUCBA LinkedINEDUCBA Instagram
  • EDUCBA YoutubeEDUCBA CourseraEDUCBA Udemy
APPS
EDUCBA Android AppEDUCBA iOS App
Blog
  • Blog
  • Free Tutorials
  • About us
  • Contact us
  • Log in
Courses
  • Enterprise Solutions
  • Free Courses
  • Explore Programs
  • All Courses
  • All in One Bundles
  • Sign up
Email
  • [email protected]

ISO 10004:2018 & ISO 9001:2015 Certified

© 2025 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you
Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

EDUCBA

Download Elasticity Formula Excel Template

EDUCBA Login

Forgot Password?

EDUCBA

डाउनलोड Elasticity Formula Excel Template

🚀 Limited Time Offer! - ENROLL NOW