Price Elasticity of Demand

Price Elasticity of Demand

The measure of how responsive the quantity demanded is to changes in price

Price elasticity of demand formula

ED= % change in quantity demanded/ % change in price

What happens when demand is elastic?

An increase in price causes a large decrease in the quantity demanded

What happens when demand is inelastic?

An increase in price causes a small decrease in quantity demanded

What relationship is there between price and quantity demanded?

Negative

Demand Curve

Where is demand more elastic?

At lower quantities, higher prices

Where is demand more inelastic

At higher quantities, lower prices

Inelastic Demand

Price elasticity of demand is < 1

Elastic Demand

Price elasticity of demand >1

Unit Elastic

Quantity demanded changes by the same % as the price changes, price elasticity of demand = 1

Perfectly Elastic

Quantity demanded changes infinitely with any change in price

Perfectly Inelastic

Quantity demanded doesn’t change with price changes

Inelastic Demand Curve

Elastic Demand Curve

Perfectly Inelastic Demand Curve

Perfectly Elastic Demand Curve

What does it mean if price and total revenue increase or decrease in the same direction?

Demand is inelastic

What does it mean if price and total revenue increase or decrease in opposite directions?

Demand is elastic

Determinants of Price Elasticity of Demand

Availability of close substitutes, necessities vs luxuries, % of budget, time

Availability of close substitutes

If there are many subs, demand is elastic

Necessities vs luxuries

If the good is considered a luxury, the demand is more inelastic

% of budget

The larger the percentage of total budget, the more elastic demand is

Time

The longer consumers have to adjust to a price change the more elastic demand is.