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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
 

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Indifference Curve Analysis of Consumer's Equilibrium
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