Posted by Anjali Kaur on Aug 04, 2020
Price Elasticity of Demand

What is the Price Elasticity of Demand?

This is one of the most scoring topics in microeconomics. Since you all have gone through the concept of demand, now in this post I will be explaining the meaning of the price elasticity of demand, the percentage change method, the proportionate method of price elasticity of demand and the types of the price elasticity of demand (I know there are geometric method and expenditure method as well, that I will discuss later). Let’s learn.

The Price Elasticity of Demand

It refers to the percentage change in quantity demanded of a commodity due to a percentage change in its price. It also refers to the degree of responsiveness of a quantity demanded of a commodity due to change in its price. This means how the demand of a commodity gets affected because of the change in the price of that commodity.

Percentage change method of Price Elasticity of Demand

Ped = Percentage change in quantity demanded/ Percentage change in Price.

price-elasticity-demand-formula

The formula for Percentage Change in Quantity Demanded =  ∆Q/ Q X 100,

Or = Change in Quantity Demanded / Original Quantity Demanded X 100

The formula for Percentage Change in Price = ∆ P/ P X 100

Or = Change in Price/ Original Price X 100

You can also refer the below image for clarity;

Percentage Change Method of Price Elasticity of Demand

Proportionate Method of Price Elasticity of Demand

The proportionate method is derived from the percentage change method of Ped. Just place the formula for change in quantity demanded and change in price in the percentage change method of Ped.

Ped = ∆Q/ Q X 100/∆ P/ P X 100

100 gets canceled, and we get the final formula for a proportionate method of price elasticity of demand,

Ped = ∆Q/∆P X P/Q

Refer the following image for more clarity;

Proportionate Change in Price Elasticity of Demand

Types of Price Elasticity of Demand

There are five types of Ped:

  • Perfectly Elastic Demand (When Ped = ∞)
    • When the percentage change in quantity demanded is infinite, even if the percentage change in price is zero, the demand is said to be perfectly elastic (endless demand at a given price). As shown below the demand curve under perfect elasticity;
Perfectly Elastic Demand Curve
  • Perfectly Inelastic Demand (When Ped = 0)
    • When the percentage change in quantity demanded is zero, no matter how the price is changed, the demand is said to be perfectly inelastic. As shown below the demand curve under perfect inelasticity;
Perfectly Inelastic Demand Curve
  • Unitary Elastic Demand (When Ped =1)
    • When proportionate or percentage change in quantity demanded is exactly equal to proportionate or the percentage change in price, then demand is said to be unitary elastic. As shown below the two shapes of unitary elastic demand curve;
Unitary Elastic Demand Curve
  • Elastic Demand or Greater than Unitary Elastic or Relative Elastic Demand (When Ped > 1)
    • When the percentage or proportionate change in quantity demanded is greater than the percentage or proportionate change in price, the demand is said to be elastic. As shown below;
Elastic Demand Curve
  • Inelastic Demand or Less than Unitary Elastic or Relative Inelastic Demand (When Ped < 1)
    •  When the percentage or proportionate change in quantity demanded is less than the percentage or proportionate change in the price, the demand is said to be inelastic. As shown below;
Inelastic Demand Curve

Trick to memorize the types of price elasticity of demand.

If the shape of the demand curve resembles half of ‘E’, then it is Perfectly ‘E’lastic demand curve and Ped is infinity.

When the shape of the demand curve resembles capital ‘I’, then it is Perfectly ‘I’nelastic demand curve and Ped is zero.

If the shape resembles the normal shape of the demand curve or it is convex in shape, then the Ped is 1.

When you tilt slightly the Perfectly Elastic demand curve, it becomes elastic and Ped > 1.

If you tilt slightly the Perfectly Inelastic demand curve, it becomes inelastic and Ped < 1.

As shown below for clarity;

Tricks to memorize the Types of Price Elasticity of Demand

Thank You!

Photo by Kelly Sikkema on Unsplash

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