Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price.
Because price and quantity demanded are inversely related, price elasticity of demand has a negative sign. It is commonly expressed using its absolute value.
Categories of Price Elasticity
| Type | Elasticity | Meaning |
|---|---|---|
| Elastic Demand | Quantity demanded changes by a larger percentage than price | |
| Inelastic Demand | Quantity demanded changes by a smaller percentage than price | |
| Unit Elastic Demand | Quantity demanded changes by the same percentage as price | |
| Perfectly Inelastic Demand | Quantity demanded does not respond to price | |
| Perfectly Elastic Demand | A very small price change causes a very large change in quantity demanded |
Determinants of Price Elasticity
Elastic Demand
Demand tends to be more elastic when:
- Many close substitutes are available.
- The good takes up a large share of income.
- The good is a luxury or non-essential.
- Consumers have a longer time to adjust.
- The market is narrowly defined.
Inelastic Demand
Demand tends to be more inelastic when:
- Few or no close substitutes are available.
- The good takes up a small share of income.
- The good is a necessity or essential.
- Consumers have little time to adjust.
- The market is broadly defined.
Elasticity Along a Linear Demand Curve
Elasticity varies at different points along the same downward-sloping linear demand curve.
- Upper-left region → More elastic
- Middle region → Unit elastic
- Lower-right region → More inelastic
For a straight-line demand curve, elasticity is therefore not constant even though the slope is constant.
Elasticity and Slope
Slope and elasticity are related but are not the same.
- A straight-line demand curve can have a constant slope but changing elasticity.
- A demand curve with constant elasticity does not have a constant slope.
