Price Elasticity

Price Elasticity of Demand (PED)

Measures the sensitivity of the quantity demanded of a good to a change in its price. Calculated as % change in quantity demanded / % change in price.

Elastic Demand

When |PED| > 1, indicating that quantity demanded is highly responsive to price changes.

Unit Elastic Demand

When |PED| = 1, indicating that quantity demanded changes proportionately with price changes.

Inelastic Demand

When |PED| < 1, indicating that quantity demanded is not very responsive to price changes.

Determinants of Price Elasticity of Demand

Ease at which consumers can substitute a good for another; price elasticity tends to be higher in the long run.

Revenue from Elastic Demand

If demand is elastic, revenue from new sales exceeds the fall in revenue from existing sales.

Own Price Elasticity of Demand

Negative or zero measure that indicates the sensitivity of consumers to price changes.

Own Price Elasticity of Supply

Positive or zero measure that indicates the sensitivity of suppliers to price changes.

Elasticities and Taxes

Elasticities help determine how producers and consumers are affected by taxes.

Specific Tax

A particular amount charged for each good sold.

Percentage Tax (Ad Valorem)

A tax based on the value of the good, proportional to its price.

Incidence of Tax

Refers to who is affected by the tax liability.

Tax Burden Distribution

The curve that is less elastic bears more of the tax burden; if supply is less elastic, the seller bears more weight; if demand is less elastic, the buyer bears more.