# Economics

Explore Economics Search
Study notes

# Explaining Price Elasticity of Demand

• Levels: AS, A Level
• Exam boards: AQA, Edexcel, OCR, IB, Other, Pre-U

Price elasticity of demand measures the responsiveness of demand after a change in a product's own price.

This is perhaps the most important microeconomic concept that you will come across in your initial studies of economics. The key is to understand the formula for calculating price elasticity, the factors that affect elasticity and then why elasticity matters for businesses when setting their prices.

What is the formula for calculating the coefficient of price elasticity of demand?

The formula for calculating the co-efficient of elasticity of demand is:

Percentage change in quantity demanded divided by the percentage change in price

Since changes in price and quantity usually move in opposite directions, usually we do not bother to put in the minus sign. We are more concerned with the co-efficient of elasticity of demand rather than the sign!

How much does quantity demanded change when price changes? By a lot or by a little? Elasticity can help us understand this important question.

What are the important values for price elasticity of demand?

We use the word "coefficient" to describe the values for price elasticity of demand

1. If Ped = 0 demand is perfectly inelastic - demand does not change at all when the price changes – the demand curve will be vertical.
2. If Ped is between 0 and 1 (i.e. the % change in demand from A to B is smaller than the percentage change in price), then demand is inelastic.
3. If Ped = 1 (i.e. the % change in demand is exactly the same as the % change in price), then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level.
4. If Ped > 1, then demand responds more than proportionately to a change in price i.e. demand is elastic. For example if a 10% increase in the price of a good leads to a 30% drop in demand. The price elasticity of demand for this price change is –3

Inelastic demand (Ped <1)

Elastic demand (Ped >1)

Perfectly inelastic demand (Ped = zero)

Perfectly elastic demand

Unitary price elasticity of demand

Evaluation

AQA, Home based

• ### Causes of Price Volatility

Student videos
• ### Price Elasticity of Demand and Indirect Taxes

Student videos
• ### Price Elasticity and Total Revenue

Student videos
• ### Factors affecting Price Elasticity of Demand

Student videos
• ### Cross Price Elasticity of Demand

Student videos
• ### Price Elasticity of Demand

Student videos

Study notes
• ### Price Elasticity of Supply

Student videos

Study notes

Study notes

• ### Economics of NHS Car Parking Charges

28th December 2016

• ### Eggzactly what you need for micro

2nd December 2016

• ### ​Vanilla Ice Cream and Elasticity

15th April 2016

• ### Price hike in vanilla from Madagascar due to changes in conditions of supply

30th March 2016

• ### Snacks on a plane

8th March 2016

• ### Britain's biscuit shortage

6th March 2016

• ### Stellios opens his easyFoodstore with 25p offers!

2nd February 2016

• ### Engaging Lesson Starter - Conveyor Belt Memory Game

29th January 2016

• ### Is Christmas getting cheaper? Inflation, elasticity and austerity

14th December 2015

• ### Rising Football Ticket Prices

1st November 2015

• 1

Collections

• 3

Collections

• 15

Collections

• 9

Collections

• 6

Collections

• ### Examiner - GCSE / GCE - Geography

Pearson Edexcel, Nationwide (Home Working)

• ### Politics CPD Presenter

tutor2u, Online

• ### Teacher of Mathematics, Part-time

Downside School, Stratton-On-The-Fosse, near Bath

• ### Teacher of Economics

Peter Symonds College, Winchester, Hampshire

New
• Browse all jobs ›