Answer to Question #97582 in Microeconomics for val

Question

Define price elasticity of demand

Answer 1

Price Elasticity of Demand (Ped) measures the change in quantity demanded of a commodity or a service, due to the change in price it, all other things being equal. It is calculated with the formula:

Ped = (% Change in Quantity demanded) / (% Change in Price)

The general sign of Price Elasticity of Demand is negative, as with the increases in the price of a good, the quantity demanded of it decreases and vice versa, which signifies the negative relation between the price and the quantity demanded.

When Ped = 0, the quantity demanded of good doesn’t change in response to the change in prices, in this case, the demand curve will be vertical and demand is perfectly inelastic.

If 0< Ped < 1, the demand curve is inelastic, with a change in prices, the quantity demanded changes very less. For example, with an increase in the price of a commodity by 10%, the quantity demanded decrease by 1%.

If Ped = 1, then the demand curve is unit elastic, and the percentage change in quantity demanded will be equal to the percentage change in price. For example, with an increase in the price of a commodity by 10%, the quantity demanded decrease by 10%.

If Ped > 1, then the change in quantity demanded is proportionately more than the change in price of the commodity. For example, with an increase in the price of a commodity by 10%, the quantity demanded decrease by 15%.

If Ped = infinity, even with a slight increase in price, the quantity demanded of the commodity will fall to zero, and the demand curve will be horizontal.