Home » Elasticity of Demand » Meaning of Price Elasticity of Demand

Meaning of Price Elasticity of Demand:

The law of demand is straight forward. It tells us when the price of a good rises, its quantity demanded will fall, all other things held constant. The law dose not indicate as to how much the quantity demanded will fall with the rise in price or how much responsive demand is to a rise price. The economists here use and measure the quantity demanded to a change in price by the concept of elasticity of demand.

What is Price Elasticity of Demand?

Definition:

Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to a change in its price. It is also defined as:

"The ratio of proportionate change in quantity demanded caused by a given proportionate change in price".

Formula For Calculation:

Price elasticity of demand is computed by dividing the percentage change in quantity demanded of a good by the percentage change in its price.

Symbolically price elasticity of demand is expressed as under:

EdPercentage Change in Quantity Demanded

Percentage Change in Price

Simple formula for calculating the price elasticity of demand:

Ed    =     %∆Q

%∆P

Here:

Ed stands for price elasticity of demand.

Q stands for original quantity.

P stands for original price.

∆ stands for a small change.

Example:

The price elasticity of demand tells us the relative amount by which the quantity demanded will change in response to a change in the price of a particular good. For example, if there is a 10% rise in the price of a tea and it leads to reduction in its demanded by 20%, the price elasticity of demand will be:

Ed = -20

+10

Ed = -2.0

Relevant Articles:

 » Meaning of Price Elasticity of Demand » Degrees of Elasticity of Demand » Measurement of Price Elasticity of Demand » Types of Elasticity of Demand » Factors Determining Price Elasticity of Demand » Importance of Elasticity of Demand

 Principles and Theories of Micro Economics Definition and Explanation of Economics Theory of Consumer Behavior Indifference Curve Analysis of Consumer's Equilibrium Theory of Demand Theory of Supply Elasticity of Demand Elasticity of Supply Equilibrium of Demand and Supply Economic Resources Scale of Production Laws of Returns Production Function Cost Analysis Various Revenue Concepts Price and output Determination Under Perfect Competition Price and Output Determination Under Monopoly Price and Output Determination Under Monopolistic/Imperfect Competition Theory of Factor Pricing OR Theory of Distribution Rent Wages Interest Profits
 Principles and Theories of Macro Economics National Income and Its Measurement Principles of Public Finance Public Revenue and Taxation National Debt and Income Determination Fiscal Policy Determinants of the Level of National Income and Employment Determination of National Income Theories of Employment Theory of International Trade Balance of Payments Commercial Policy
 Development and Planning Economics Introduction to Development Economics Features of Developing Countries Economic Development and Economic Growth Theories of Under Development Theories of Economic Growth Agriculture and Economic Development Monetary Economics and Public Finance History of Money