Elasticities

Price elasticity of demand (PED)

Definition: A measure of the responsiveness of the quantity demanded to a change in price

Formula for PED: %change in quantity demanded/ % change in price

How to remember: Q before you P

If PED is between 0 and -1 then it is inelastic

If PED is between -1 and infinity it is elastic

Demand curve for a good is always downward sloping. This means that the numerical answer to any PED measure will be negative. The PED measure tells us about how sensitive the change in demand is

Demand is relatively price elastic when the percentage change is quantity demanded is greater than the percentage change in price

Demand is relatively price inelastic when the percentage change in quantity demanded is lower/smaller than the percentage change in price

Demand is unitarily elastic when the percentage change in quantity demanded is the same as the percentage change in price.

PED Values change down the Demand curve

The key is to remember that elasticity is defined in terms of the percentage changes in price and quantity.

When price is relatively high, a 1 pence change in price is a small percentage change in price is a small percentage change in quantity demanded will be relatively large because demand is low at this point on the curve

When price is relatively low, a 1 pence change in price is a larger percentage but the percentage change in quantity demanded will be relatively small because demand is high at such low prices

Extreme causes

Perfectly inelastic demand with respect to price PED=0 demand is totally insensitive to price

Perfectly elastic demand with respect to price PED = infinity: consumers demand an unlimited quantity of the good at P*

Influences on PED