Economics: Price elasticity of demand

Price elasticity of demand is a measure of the extent to which the quantity demanded changes as a result of a change in price.

PED becomes more elastic as the price of the product rises. Consumer become more sensitive to price changes, the higher the price of the product.

Elastic demand: is when the quantity demanded changes by a greater percentage than the change in price.

Perfectly elastic: When a change in price causes a complete change in the quantity demanded.

Inelastic demand: is when the quantity demanded changes by a smaller percentage than the change in price.

Perfectly inelastic: when a change in price has no effect on the quantity demanded.

Unitary elastic: when a change in price causes an equal change in the quantity demanded, leaving total revenue unchanged.

Main factor that determines elasticity

· the availability of close substitutes of the product.

· As price rises, demand becomes more elastic

· An increase in demand will make the demand more elastic.

Demand for a product is likely to be inelastic if it

· has no close substitutes

· Takes up a small proportion of income to be bought

· It is a necessity

· addictive

· Purchase cannot be postponed

PED = Percentage change in quantity demanded
Percentage change in price

PED = %QD
%P