Price Elasticity of Demand
The term elasticity is used by economists to measure the responsiveness of one variable to changes in another variable. Price elasticity of demand measures the responsiveness of demand to changes in price. It involves comparing the proportional changes in the price with the proportional changes in the quantity demanded.
Economists express the relationship between the proportional changes in price and demand in the form of a ratio or coefficient. This is called the price elasticity of demand coefficient and is given below:
|PED coefficient. =||proportional change in the quantity demanded|
|proportional change in the price|
If a change in price causes the quantity demanded to change by a greater proportion then the value of the coefficient will be greater than one. In this case demand is described as price elastic. An elastic demand curve is shown below.
If the quantity demanded changes by a smaller proportion than price then the value of the coefficient will be less than one. In this case demand is described as price inelastic. An inelastic demand curve is shown below.
If the quantity demanded changes by an equal proportion to price then the value of the coefficient will be equal to one. In this case demand is said to have unitary elasticity. A unit elastic demand curve is shown below.
The table below summarises the different possible values of the price elasticity.
|Price elastic||PED > 1||% change in quantity demanded is greater than the % change in Price|
|Price inelastic||PED < 1||% change in Price is greater than the % change in quantity demanded|
|Unitary elasticity||PED = 1||% change in Price is equal to the % change in quantity demanded|
Any time the price of a good or service changes then the impact on the quantity demanded will depend upon the price elasticity of demand.