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:
Ed = Percentage 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
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