Price Elasticity of demand:
A measure of the relationship between changes in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
If a small change in price is
accompanied by a large change in quantity demanded, the product is said to be
elastic (or responsive to price changes). Conversely, a product is inelastic if
a large change in price is accompanied by a small amount of change in quantity
demanded.
Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes). Values between zero and one indicate that demand is inelastic (this occurs when the percent change in demand is less than the percent change in price). When price elasticity of demand equals one, demand
is unit elastic (the percent change in demand is equal to the percent change in price). Finally, if the value is
greater than one, demand is perfectly elastic (demand is affected to a greater degree by changes in price).
For example, if
the quantity demanded for a good increases 15% in response to a 10% increase in
price, the price elasticity of demand would be 15% / 10% = 1.5.
The
main differences between an elastic demand and an inelastic demand have been
explained in details as follows:
Elastic Demand:
· When a small change in price brings about more than proportionate change in demand, it is known as the elastic demand.
· The demand curve is flatter.
· Luxuries and comforts have elastic demand.
· Examples of elastic demand are Color T.V. sets, Prestige goods, etc.
· Perfectly elasticity of demand is not practical, while relative elasticity is seen in case of moderately priced goods.
· The coefficient of elasticity of demand is greater than 1, that it ed >
Inelastic Demand:
· When a big change in price brings about less than proportionate change in demand, it is known as inelastic demand.
· The demand curve is steeper.
· Necessary items can be termed as inelastic demand.
· Examples of Inelastic demand are salt, rice, food grains, etc.
· Perfectly inelasticity of demand is seen in the demand of necessary goods, while relative inelasticity is seen in case of very expensive goods.
· The coefficient of elasticity of demand is less than 1, that is ed < 1.