Price Elascity of Demand

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  • Topic: Supply and demand, Price elasticity of demand, Elasticity
  • Pages : 4 (1208 words )
  • Download(s) : 87
  • Published : September 26, 2010
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The price elasticity of demand (PED) is “a measure of how much the quantity demanded of a good responds to a change in price of the good” (Mankiw 2007, p.90). It is a form of measure to determine how willing consumers are to move away from the good as the price of the good rises. Most of the time, there are factors that determines the PED, such as availability of close substitutes, necessities versus luxuries, definition of the market and time horizon. In order to calculate the PED, a formula is calculated using the percentage change in the quantity demanded divided by the percentage change in the price.

Elastic demand that has the coefficient of greater than 1 suggests that there would be a significant change in quantity demanded when there is a little change in price while inelastic demand has a coefficient of less than one, which has a little change in quantity demanded even when there is a significant change in price. Unitary demand occurs when there is a coefficient of exactly one and there is an exact change in quantity demanded in proportion to the change in price (Bolotta et al. 2002) .

There are two ways to calculate the PED. Firstly, it is called the point method or also known as geometrical method (DEISU 2008). Under this method, we measure the elasticity of demand at any point of a demand curve using the formula,

Elasticity at any point on the straight line can be calculated using the point method provided that the demand line is linear.

The better way to calculate the PED is by using the midpoint method, which is to calculate the PED between two points on a demand curve by averaging the 2 initial and final points chosen. The midpoint approach averages the prices and quantities demanded, thus arriving at an average elasticity estimate for the range of values covered on the demand curve. The formula is,

The product that is chosen to explain the theory of PED is rice. Rice is one of the perfect examples of inelastic demand...
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