Price Elasticity of Demand

• Elasticity of demand- degree of responsiveness of

demand to change in price.

• EP = Percentage change in amount demanded

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Percentage change in price
• EP = ∆q p
___ x __
∆p q
• Inelastic demand - when the
buyer's demand does not change as much as
the price changes
• This situation typically occurs with everyday
household products and services.
• Elastic demand - when price or other factors
have a big effect on the quantity consumers
want to buy
 Degrees of price elasticity of demand

• Perfectly Elastic Demand: EP = ∞

• Perfectly Inelastic Demand: EP = 0
• Unitary Elasticity of Demand: EP = 1
• Relatively Elastic Demand: EP > 1
• Relatively Inelastic Demand: EP < 1
Importance of Elasticity of Demand
• International trade - A country may fix higher
prices for the products with inelastic demand.
• Formulation of Government Policies -
Government can impose higher taxes on goods
with inelastic demand, whereas, low rates of taxes
are imposed on commodities with elastic demand
• Factor Pricing - f demand for a particular factor is
inelastic as compared to the other factors, then it
will attract more rewards
• Decisions of Monopolist - If demand for the product
is elastic, then he will fix low price. However, if
demand is inelastic, then he is in a position to fix a
high price
• Paradox of poverty amidst plenty - happens due to
inelastic demand for most of the agricultural
products
• When supply of crops increases as a result of rich
harvest, their prices drastically fall due to inelastic
demand
Factors affecting price elasticity of demand

• Nature of Commodity
• Substitutes
• Variety of uses
• Deferred Consumption
• Habits