Semester 5 / Business Economics and Financial Accounting / Economics / Price Elasticity of Demand

Price Elasticity of Demand

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Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price.

Ed=% change in quantity demanded% change in priceE_d = \frac{\%\text{ change in quantity demanded}}{\%\text{ 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

TypeElasticityMeaning
Elastic Demand∣Ed∣>1\lvert E_d\rvert > 1Quantity demanded changes by a larger percentage than price
Inelastic Demand∣Ed∣<1\lvert E_d\rvert < 1Quantity demanded changes by a smaller percentage than price
Unit Elastic Demand∣Ed∣=1\lvert E_d\rvert = 1Quantity demanded changes by the same percentage as price
Perfectly Inelastic DemandEd=0E_d = 0Quantity demanded does not respond to price
Perfectly Elastic DemandEd=∞E_d = \inftyA 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
Elasticity Along a Linear Demand Curve Price Quantity Demanded More elastic Unit elastic More inelastic D
Elasticity falls moving down the same straight-line demand curve D: the upper-left region is more elastic, the middle region is unit elastic, and the lower-right region is 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.

Worked Examples

Calculating PED

The price of good X falls by 5% and quantity demanded rises by 25%. Find the PED.

Solution Reveal Hide
∣Ed∣=∣25%−5%∣=5\lvert E_d \rvert = \left\lvert \frac{25\%}{-5\%} \right\rvert = 5

Since ∣Ed∣>1\lvert E_d \rvert > 1, demand is elastic, so a price cut raises total revenue.

Quantity After a Price Cut

For ballpoint pens, Ed=−3.0E_d = -3.0. At Rs. 25, 300 pens are demanded. Find the quantity demanded at Rs. 20.

Solution Reveal Hide
%ΔP=20−2525=−20%\%\Delta P = \frac{20 - 25}{25} = -20\%%ΔQ=Ed×%ΔP=−3×−20%=+60%\%\Delta Q = E_d \times \%\Delta P = -3 \times -20\% = +60\%Q=300×1.6=480Q = 300 \times 1.6 = 480

480 pens are demanded.

Price for a Target Quantity

For Milo, Ed=−1.0E_d = -1.0. At Rs. 60, 500 units are demanded. Find the price that gives a quantity demanded of 600.

Solution Reveal Hide
%ΔQ=600−500500=+20%\%\Delta Q = \frac{600 - 500}{500} = +20\%%ΔP=%ΔQEd=20%−1.0=−20%\%\Delta P = \frac{\%\Delta Q}{E_d} = \frac{20\%}{-1.0} = -20\%P=60×0.8=48P = 60 \times 0.8 = 48

The price is Rs. 48.

Written by October 16, 2026 3 min read
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