Price Elasticity of Demand [ Biz/ed Virtual Developing Country ]

The Virtual Developing Country is a case study of Zambia. There are a series of field trips available looking at different issues connected with economic development. This tour is the trade tour, and this page looks at the value of the price elasticity of demand and how it is calculated.

Theories

Price Elasticity of Demand

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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.

Elastic demand curve

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.

Inelastic demand curve

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.

Demand curve - unitary elasticity

The table below summarises the different possible values of the price elasticity.

PED Definition
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.

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Related Glossary Items:
Price Elasticity of Demand

Related Theories:
The Marshall-Lerner Condition
Consumer and Producer Surplus