Price Elasticity of Demand

Price Elasticity of Demand

1. % change in demand/ % change in price

   • Formula

2. Determinants

   • Substitutes
     • If there are lots of substitutes available the price is elastic
   • Necessity
     • Luxurys are elastic
     • Necessitys are inelastic
   • Habit
     • Habit forming goodss, such as cigarettes, are price inelastic
   • Income
   • Time

3. Responsiveness of demand to a change in price

   • Unity
     • P'eD=1
   • Inelastic
     • Demand not responsive to change in price
       • Raising prices increases revenue
     • P'eD<1
       • P'eD = 0
         • Demand is perfectly inelastic
   • Elastic
     • Demand responsive to change in price
       • Lowering prices increases revenue
     • P'eD>1
       • P'eD=infinity
         • Demand is perfectly elastic

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