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Price Elasticity of Demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the absolute value of the percentage change in quantity demanded divided by the percentage change in price.
Elastic, Unit-Elastic, Inelastic Demand
Qualitative Labels for Price Elasticity of Demand [PED].
If PED > 1: Elastic
If PED = 1: Unit-Elastic (also unitary elastic)
If PED < 1: Inelastic
If PED = 0: Perfectly Inelastic
The mnemonic device: "Insulin is inelastic" or "Insulin has inelastic demand" can help keep this straight.
total revenue
= price x quantity
How to use price elasticity of demand to maximize total revenue
If PED is inelastic -> raise price
If PED is elastic -> lower price
Price Elasticity of Demand in the Short-run versus the Long-run
PED is more inelastic in the short-run (shorter period of time), more elastic in the long-run (longer period of time).
It takes time for consumers to adjust life habits, what products they use, etc.
