1
Elasticity of Demand
We know, from the Law of Demand, that price and quantity
demanded are inversely related.
Now, we are going to get more specific in defining that
relationship, … allows us to analyze demand and supply with
greater precision.
We want to know just how much will quantity demanded change
when price changes? That is what elasticity of demand measures.
It is a measure of how much buyers and sellers respond to
changes in market conditions
Price elasticity of demand is a measure of how much the quantity
demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity
demanded given a percent change in the price.
Elasticity of Demand
The above formula usually yields a negative value, due to the
inverse nature of the relationship between price and quantity
demanded.
How Do We Interpret the Price Elasticity of Demand?
A good economist is not just interested in calculating numbers.
The number is a means to an end;
in the case of price elasticity of demand it is used to see how
sensitive the demand for a good is to a price change.
The higher the price elasticity, the more sensitive consumers are
to price changes.
A very low price elasticity implies just the opposite, that
changes in price have little influence on demand.
Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price
We can read it as the percentage change in quantity for a
1% change in price
Thus, if Ed = 2, that means in that part of the demand
curve, a 1% change in price will cause a 2% change in
quantity demanded. Or if we extrapolate, a 2% change in
price will cause a 4% change in quantity demanded, and
so on.
Elasticity of Demand
Degrees of Ed
Perfectly Inelastic
•Ed = % Δ in Qd
% Δ in P
•Ed = 0___
% Δ in P
•Ed = 0 it is also called zero elasticity
docsity.com
