Finally, the result provided by the formula will be accurate only when the changes in price and quantity are small. The result will be less accurate when the changes are large. Since PED is based off of percent changes, the starting nominal quantity and price matter. At low prices and high quantities, the PED is therefore more inelastic. Similarly, at high prices and low quantities, PED is more elastic.
Price Elasticity of Demand and Revenue : PED is based off of percent changes, so the starting nominal values of price and quantity are significant. The price elasticity of demand PED explains how much changes in price affect changes in quantity demanded. The price elasticity of demand PED is a measure of the responsiveness of the quantity demanded of a good to a change in its price. It can be calculated from the following formula:.
When PED is greater than one, demand is elastic. When PED is less than one, demand is inelastic. The effect of price changes on total revenue PED may be important for businesses attempting to distinguish how to maximize revenue For example, if a business finds out its PED is very inelastic, it may want to raise its prices because it knows that it can sell its products for a higher price without losing many sales. Conversely, if a business finds that its PED is very elastic, it may wish to lower its prices.
This would allow the business to dramatically increase the number of units sold without losing much revenue per unit.
There are two notable cases of PED. The first is when demand is perfectly elastic. Perfectly elastic demand is represented graphically as a horizontal line. In this case, any increase in price will lead to zero units demanded.
Perfectly Elastic Demand : Perfectly elastic demand is represented graphically by a horizontal line. In this case the PED value is the same at every point of the demand curve.
The second is perfectly inelastic demand. Unit 1: Introduction to Economics. Unit 2: Supply and Demand. Unit 3: Markets and Individual Maximizing Behavior. Unit 4: The Consumer. Unit 5: The Producer. Study Guide. Course Feedback Survey. Certificate Final Exam. Saylor Direct Credit. About Saylor Academy.
Elasticity can be described as elastic or very responsive , unit elastic, or inelastic not very responsive. Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied. The demand curve is inelastic in this area; that is, its elasticity value is less than one. The demand curve is elastic in this interval. The supply curve is elastic in this area; that is, its elasticity value is greater than one.
The supply curve is inelastic in this region of the supply curve. Previous: Introduction to Elasticity Next: 5. Skip to content Chapter 5. Learning Objectives By the end of this section, you will be able to:. Calculate the price elasticity of demand Calculate the price elasticity of supply.
Finding the Price Elasticity of Demand Calculate the price elasticity of demand using the data in Figure 1 for an increase in price from G to H. Step 1. Is the elasticity the slope? Self-Check Questions From the data shown in Table 2 about demand for smart phones, calculate the price elasticity of demand from: point B to point C, point D to point E, and point G to point H.
Classify the elasticity at each point as elastic, inelastic, or unit elastic. From the data shown in Table 3 about supply of alarm clocks, calculate the price elasticity of supply from: point J to point K, point L to point M, and point N to point P. Review Questions What is the formula for calculating elasticity? What is the price elasticity of demand? Can you explain it in your own words? To log in and use all the features of Khan Academy, please enable JavaScript in your browser.
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Price elasticity of demand using the midpoint method. More on elasticity of demand.
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