Price Elasticity of Demand

Only available on StudyMode
  • Download(s) : 106
  • Published : November 25, 2012
Open Document
Text Preview
Price Elasticity of Demand is used to measure the responsiveness of the quantity demanded to the change in price. It is measured by the percentage of change in quantity over the percent change in price [% ∆ in quantity demanded/ % ∆ in price]. Price elasticity of demand (PED) does not have any units as all the units cancel out while calculating it. Also, │PED│ is usually negative because the value of quantity demanded will always be inverse to its price (i.e. when price gets high, quantity demanded decreases and vice versa). This is also a reason why │PED│ is written as an absolute value. When the value of PED is more than 1, it is a relatively more elastic demand, when equals to 1, it is unit elastic and when less than 1, the demand becomes inelastic.

The slope of a demand curve cannot indicate the PED because the slope and elasticity are two different concepts. Slope measures the steepness and flatness of the curve and give units of price and quantity at a point. On the other hand price elasticity of demand measures the responsiveness of quantity to the changes in price. In a demand curve, the slope decreases by a constant unit while In PED, elasticity is different at each point.

As shown in the picture above, PED changes at every point. At the change in quantity from 2.5 to 3, and change in price from 15 to 14, the PED is │2.64│ while at the change in quantity from 7 to 7.5,

and change in price from 6 to 5, the PED is │0.38│. On the other hand, while seeing the slope of the line, it is changing by 2 units throughout. This shows that while the slope remains constant, the elasticity keeps varying on the curve. This is also one of the reasons that elasticity is relatively more elastic on the upper portion of the demand curve compared to the lower portion of the curve which gradually gets perfectly inelastic when the demand curve intersects the horizontal axis. Thus, the frequent change in elasticity at every point and the slope being constant...
tracking img