Price Elasticity of Demand

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Price Elasticity of Demand

Like its name suggests, price elasticity of demand is a measure of how responsive the quantity demanded of a good or service is to that good or service's price.  We can think about price elasticity of demand on an individual level (responsiveness of individual quantity demanded to price) or a market level (responsiveness of market quantity demanded to price).

Mathematically, price elasticity of demand is equal to the percent change in the quantity demanded of a good or service divided by the percent change in the price of the good or service that generated the change in quantity demanded.  (Notice that a proper price elasticity calculation will hold all factors other than changes in price constant.)  As with other elasticities, we can use this formula to calculate point elasticity or we can use the midpoint formula to calculate an arc elasticity version of price elasticity of demand.

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The Sign of Price Elasticity of Demand

Since the law of demand implies that demand curves almost always slope downward (unless of course a good is a Giffen good), price elasticity of demand is almost exclusively negative.  Sometimes, as a convention, price elasticity of demand is reported as an absolute value (i.e. a positive number) and the negative sign is merely implied.

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Perfect Price Elasticity and Inelasticity

As with other elasticities, price elasticity of demand can be categorized as perfectly elastic or perfectly inelastic.  If price elasticity of demand is perfectly inelastic, then the quantity demanded of a good doesn't change at all when the good's price changes.  (One would hope that necessary medications would be examples of this type of good, for example.)  As with other elasticities, perfectly inelastic in this case corresponds to a price elasticity of demand equal to zero.

If price elasticity of demand is perfectly elastic, then the quantity demanded of a good changes by essentially an infinite amount in response to even the tiniest change in the good's price.  Perfectly elastic in this case corresponds to a price elasticity of demand of either positive or negative infinity, depending on whether the convention to report price elasticity of demand as an absolute value is followed..

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Price Elasticity of Demand and the Demand Curve

We know that, while not equal to the slopes of the demand and supply curves, price elasticity of demand and price elasticity of supply are related to the slopes of the demand and supply curves, respectively.  Because a change in a good's price, all else remaining constant, results in a movement along a demand curve, price elasticity of demand is calculated by comparing points on a single demand curve.

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Beggs, Jodi. "Price Elasticity of Demand." ThoughtCo, Feb. 1, 2016, thoughtco.com/price-elasticity-of-demand-1147365. Beggs, Jodi. (2016, February 1). Price Elasticity of Demand. Retrieved from https://www.thoughtco.com/price-elasticity-of-demand-1147365 Beggs, Jodi. "Price Elasticity of Demand." ThoughtCo. https://www.thoughtco.com/price-elasticity-of-demand-1147365 (accessed January 16, 2018).