Economics Exam Notes: Price Elasticity of Demand and Supply

Price Elasticity of Demand: Understanding Market Responsiveness

This section delves into price elasticity of demand, a crucial concept for understanding why different businesses adopt varying pricing strategies, such as streaming services increasing prices and restaurants cutting them.

I. Introduction to Price Elasticity of Demand ($E_{p,d}$)

• Definition: Price Elasticity of Demand ($E_{p,d}$) measures the responsiveness of the quantity demanded to a change in price.

  • Formula: $E_{p,d} = \frac{\text{Percent Change in Quantity Demanded}}{\text{Percent Change in Price}}$.

• Interpretation based on Value Compared to One:

  • The value of interest for elasticity is whether it's greater than or less than $1$.

II. Types of Price Elasticity of Demand

A. Inelastic Demand (E_{p,d} < 1)

• Definition: When the price elasticity of demand is less than one, meaning the percentage change in quantity demanded is less than the percentage change in price.

  • Responsiveness: Consumers are not very responsive to price changes; the good is