Understanding Price Elasticity of Demand and Supply

Price Elasticity of Demand

A measure of the responsiveness of quantity demanded to changes in price.

ED = %^QD/%^P

Formula of Price Elasticity Demand

ED = ^QD/QDaverage =^P/Paverage

price elasticity of demand can lead to conflicting results depending on whether price rises or falls. Therefor, economists use what formula

Absolute Value

The distance a number is from zero on a number line. ALWAYS POSITIVE

Elastic Demand

Occurs when the percentage change in quantity demanded is greater than the percentage change in price (Ed > 1).

Inelastic demand

the demand when the percentage change in quantity demanded is less than the percentage change in price.

Unit elastic demand

the demand when the percentage change in quantity demanded is equal to the percentage change in price.

Perfectly Elastic demand

the demand when a small percentage change in price causes an extremely large percentage change in the quantity demanded.

Perfectly inelastic demand

the demand when the quantity demanded does not change as price changes.

Total revenue

the price of a good times the quantity of the good sold.

Elastic Demand and Total Revenue

If demand is elastic, △Qd is greater than △P. Price and total revenue are inversely related.

Inelastic Demand and Total Revenue

If demand is inelastic, △Qd is less than △P. Price and total revenue are directly related.

Unit Elastic Demand and Total Revenue

If demand is unit elastic, △Qd is equal to △P. A rise or fall in price will leave total revenue unchanged.

Price Elasticity of Supply

a measure of the responsiveness of quantity supplied to changes in price.

Formula for coefficient of price elasticity of supply

Es = %△Qs / %△P

Elastic supply

refers to a percentage change in quantity supplied that is greater than the percentage change in price.

Inelastic supply

refers to a percentage change in quantity supplied that is less than the percentage change in price.

Unit Elastic supply

refers to a percentage change in quantity supplied that is equal to the percentage change in price.

Perfectly Elastic supply

a small change in price changes the quantity supplied by an infinitely large amount.

Perfectly inelastic supply

a change in price brings no change in quantity supplied.