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 priceSince 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
Inelastic demand (Ped <1)
Elastic demand (Ped >1)
Perfectly inelastic demand (Ped = zero)
Perfectly elastic demand
Unitary price elasticity of demand