Price Elasticity of Demand

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 2 (542 words) Published: February 3, 2013
Price Elasticity Of Demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is: “Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price”. If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded. Degrees of Price Elasticity of Demand

A change in price leads to a change in demand. If price increases, demand contracts, and vice versa. But variation in demand is not always uniform when there is a change in price. In some cases, with a given change in price, demand shows a marked change, whereas in other cases the demand is not so responsive to changes in price. For example, even if the price of salt varies widely, we continue to buy almost the same quantity the demand is inelastic. But if the price of wireless sets falls, many people, who could not afford before, may now be induced to buy; the demand will stretch or expand; it is elastic. Depending upon the degree of responsiveness of the amount demanded to the price changes, the economists distinguish five kinds of price elasticity of demand. 1.Perfectly Elastic Demand- When even an infinitesimally small reduction in price leads to an unlimited extension of demand and an infinitesimally small rise in the price cause the demand to fall to zero, we say that the demand is perfectly elastic or the elasticity of demand is infinite. 2.Perfectly Inelastic Demand-When, however-much the price may fall or rise, the amount demanded remains the same, i.e., the demand is non-responsive to price changes, we say that the demand is perfectly inelastic or the...
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