Explaining Price Elasticity of Demand | tutor2u Economics

# Economics

Explore Economics Search
Study notes

# Explaining Price Elasticity of Demand

• Levels: GCSE, AS, A Level, IB
• Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

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

All About Elasticity - Our Revision Playlist on You Tube

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 the coefficient of price elasticity, the factors that affect elasticity and also why elasticity is important 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

#### Subscribe to email updates from tutor2u Economics

Join 1000s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.

##### Job board

St Dunstan's College, Catford, London

New

• ### Elasticity and Tax Incidence (Chains of Reasoning Revision Video)

Practice exam questions
• ### Price Volatility in the Coffee Market

Student videos
• ### Price Elasticity of Demand - Two Example Calculations

Student videos

Study notes
• ### Elastic Demand - Prices and Producer Revenue

Student videos
• ### Inelastic Demand - Prices and Producer Revenue

Student videos
• ### Elasticity and Total Revenue (MCQ Revision Questions)

Practice exam questions

• ### Elasticities of Demand MCQ Revision Question

Practice exam questions
• ### Causes of Price Volatility

Student videos

• ### St Valentine's price discrimination

9th February 2018

• ### Latte Levy - a surcharge for use of takeaway paper cups

5th January 2018

• ### Premium demand lifts whisky sales

30th October 2017

• ### Elasticity of Demand in Action: Sugary Drink Demand and Higher Prices

17th October 2017

• ### Price Elasticity of Demand and Student Accommodation

14th September 2017

• ### Microeconomics diagram in your pocket

4th June 2017

• ### 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

Study notes

Study notes

Study notes

Study notes

Study notes

Study notes

Study notes

Study notes

Study notes
• ### UK Inflation - Building Questions Around the Data

Study notes
• All Study notes ›

Study notes

Study notes

Study notes

Study notes

Study notes

## Macroeconomics Example Essays (Volume 1) for A Level Economics

• SKU: 02-4130-30006-03
• Printed Edition

• £5.00

## Behavioural Economics Example Essays (Volume 1) for A Level Economics

• SKU: 02-4130-30038-03
• Printed Edition

• £5.00

• ### Business Studies Teacher - Senior School

Repton School Dubai, Dubai, UAE

New
• ### Teacher of Business4 days left to apply

Cardinal Newman RC School, Luton

St Dunstan's College, Catford, London

New
• ### Summer 2018 Examiner Vacancies – A-level Economics and A-level Business

AQA, Home based

• Browse all jobs ›

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›