Economists define elasticity of demand as to how reactive the demand for a product is to changes in factors such as price or income. Let us learn more about the price elasticity of demand. However, before we go further, let us briefly revisit the laws of supply and demand.
Laws of Demand and Supply
The law of demand states that all conditions being equal, as the price of a product increases, the demand for that product will decrease. Consequently, as the price of a product decreases, the demand for that product will increase. Therefore, the law of demand defines an inverse relationship between the price and quantity factors of a product.
The law of supply, on the other hand, states that all factors being constant, an increase in price will cause an increase in the quantity supplied. That is the quantity being supplied will move in the same direction as the price. Production units will invest more in production and supply more products for sale at an increased price. Therefore, the law of supply defines a direct relationship between the price and quantity.
Browse more Topics under Theory Of Demand
Meaning And Determinants Of Demand
Law Of Demand And Elasticity Of Demand
Exceptions to the Law of Demand
Elasticity of Demand
Movement along the Demand Curve and Shift of the Demand Curve
Income Elasticity of Demand
Cross Elasticity of Demand
Methods of Demand Forecasting
Price Elasticity of Demand
Now as mentioned earlier, the elasticity of demand measures how factors such as price and income affect the demand for a product. Price elasticity of demand measures how the change in a product’s price affects its associated demand. Now you can measure the price elasticity of demand (PED) mathematically as follows:
Price Elasticity of Demand (PED) = % change in quantity demanded / % change in price
Next, let us look at how we can measure PED.
Coefficient of Price Elasticity
Economists measure the price elasticity of demand (PED) in coefficients. In response to the change in price, demand for a product can be elastic, perfectly elastic, inelastic, or perfectly inelastic based on the coefficient.
Now, you need to understand that since price and demand move in opposite directions, the coefficient will have a negative value. However, in most cases, economists do not use the negative sign and focus on the coefficient itself. Let us now look at the numerical values of the coefficient of PED.
Perfectly Inelastic (PED = 0)
When the price elasticity of demand or PED is zero, then the demand is perfectly inelastic. That is, there is no change in the quantity demanded in response to the change in price. The demand curve remains vertical. Demand is completely unresponsive to the change in price.