Elasticity of Demand

Law of Demand

States that there is an inverse relationship between price and quantity demanded for a product.

Elasticity

A measure of how sensitive quantity demanded is to a change in price.

Inelastic Demand

Demand is inelastic when quantity demanded is insensitive to price changes, meaning a change in price results in a relatively small change in quantity demanded.

Elastic Demand

Demand is elastic when quantity demanded is sensitive to price changes, meaning a small change in price results in a large change in quantity demanded.

Unit Elastic

Occurs when the percent change in quantity demanded is equal to the percent change in price, resulting in an elasticity coefficient of 1.

Perfectly Inelastic Demand

Demand where quantity demanded does not change at all regardless of price changes, resulting in an elasticity coefficient of 0.

Perfectly Elastic Demand

Demand where any price change causes quantity demanded to drop to zero, resulting in an infinite elasticity coefficient.

Elasticity Coefficient

Calculated as the percent change in quantity divided by the percent change in price, indicating the elasticity of demand.

Total Revenue Test

A method to determine how total revenue changes in response to price changes depending on whether demand is elastic or inelastic.

Inelastic Demand Total Revenue Effect

When the price increases, total revenue increases since quantity demanded decreases only slightly.

Elastic Demand Total Revenue Effect

When the price increases, total revenue decreases since quantity demanded decreases significantly.