Price Elasticity of Demand

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 4 (1385 words) Published: October 31, 2007
Price elasticity of demand
In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price. Introduction

When the price of a good falls, the quantity consumers demand of the good typically rises; if it costs less, consumers buy more. Price elasticity of demand measures the responsiveness of a change in quantity demanded for a good or service to a change in price. Mathematically, the PED is the ratio of the relative (or percent) change in quantity demanded to the relative change in price. For most goods this ratio is negative, but in practice the elasticity is represented as a positive number and the minus sign is understood. For example, if for some good when the price decreases by 10%, the quantity demanded increases by 20%, the PED for that good will be two. When the Price Elasticity of Demand of a good is greater than one in absolute value, the demand is said to be elastic; it is highly responsive to changes in price. Demands with an elasticity less than one in absolute value are inelastic; the demand is weakly responsive to price changes. Interpretation of elasticity

n = 0Perfectly inelastic.
0 < n < 1Relatively inelastic.
n = 1Unit elastic.
1 < n < ∞Relatively elastic.
n = ∞Perfectly elastic.

For all normal goods and most inferior goods, a price drop results in an increase in the quantity demanded by consumers. The demand for a good is relatively inelastic when the quantity demanded does not change much with the price change. Goods and services for which no substitutes exist are generally inelastic. Demand for an antibiotic, for example, becomes highly inelastic when it alone can kill an infection resistant to all other antibiotics. Rather than die of an infection, patients will generally be willing to pay whatever is necessary to acquire enough of the antibiotic to...
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