Price Elasticity of Demand

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What Is Price Elasticity Of Demand?

Price elasticity of demand is defined as the degree to which the effective desire for something changes as its price changes. Generally, people’s desire over things changes as those things become more expensive. A price change of a commodity affects its demand. 

We can find the elasticity of demand, or the responsive degree of demand by comparing the percentage of price changes with the quantities demanded. In this full comprehensive article, we will look at the concept of the price of elasticity of demand. We will also take a quick look at its various types and learn price elasticity of demand formula.

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Price Elasticity Of Demand Formula

Price elasticity of demand can be defined as an economic measure of the change in the quantity demanded or purchased of a product concerning its price change. Expressed mathematically, i.e., price elasticity of demand formula is:

Price elasticity of demand formula is (% Change in Quantity Demanded / % Change in Price).

Cross Price Elasticity Of Demand

The cross-price elasticity of demand is an economic concept that measures the responsiveness in quantity demanded of one good when the price for other good changes. This measurement is calculated by taking the percentage change in the quantity demanded of one good divided by the percentage change in the price of the other good.

Price Elasticity Of Demand Calculator

The price elasticity of demand calculator is a tool for everyone who is trying to produce the perfect price for their products. In this, you will be able to decide whether you should charge more for your product or decrease the price, but increase the demand.

This calculator uses the midpoint formula for the elasticity of demand. Once you calculate its value, you can head straight to the ideal price calculator to deduce what price is the best for your product.

How To Calculate Price Elasticity Of Demand

We divide the change in quantity by initial quantity to calculate a percentage. If the price rises from $50 to $70, we divide 20/50 = 0.4 = 40%.

So, this is how to find price elasticity of demand.

Price Elasticity Of Demand Examples

  • Price inelastic – a change in price causes a smaller percentage change in demand.

  • Price elastic – a change in price affects a bigger percentage change in demand.

Some Price Elasticity of Demand Examples are:

Price Inelastic Examples:

  • Petrol: Petrol has few alternatives because people who own a car need to buy petrol. For many, driving is a necessity.

  • Diamonds: Diamonds are the ultimate luxury and bought very infrequently with a few exact alternatives.

  • Cigarettes: If cigarette tax increases someday, and all tobacco prices increase, demand will be inelastic, as many smokers are addicted and don’t have any alternatives.

  • Apple iPhones or iPads: The Apple brand is so strong that many consumers will pay a premium for Apple products. If someday the price rises for Apple iPhone, many will continue to buy.

Price Elastic Examples:

  • Heinz Soup: These days, there are many alternatives to this. If the price rises, people will switch to less expensive categories.

  • Shell Petrol: We say that petrol is universally inelastic. But, if an individual petrol station increases the price, people can buy from other petrol stations.

  • Tesco Bread: Tesco bread will be highly-priced elastic as there are many better alternatives. If the price of Tesco bread rises, consumers can switch to alternatives, such as Kingsmill.

  • Porsche Sports Car: If a Porsche price increases, demand will probably be elastic because it is a high % of income, so the higher price will put people off.

Solved Examples

Question: How does the responsiveness of quantity affect price elasticity of demand?

Answer: By definition, the elasticity of demand is the change in demand due to the change in one or more of the variable factors that it depends on. Therefore, the price elasticity of demand is defined as the responsiveness of quantity demanded to a change in price and quantity demanded to a change in income.

Fun Facts

Over time, the demand for goods would lean to become more price elastic. For example, when the prices of oil increases, the quantity demanded of oil would not fall by a lot in the beginning. However, in the long run, consumers would tend to change to more fuel-efficient cars. If a vast part of income is used to buy goods, it would have a more price elastic demand.

FAQ (Frequently Asked Questions)

1. What are the Determinants of Price Elasticity of Demand?

Answer: There are three determinants of the price elasticity of demand. They are:

  1. The availability of close substitutes: If a product has many close alternatives, for example, fast food, then people tend to react strongly to a price increase of one firm’s fast food. Thus, the price elasticity of demand for this product is high.

  2. The importance of the product’s cost in one’s budget: If a product, like salt, is very inexpensive, consumers are relatively detached about a price increase. Hence, salt has a low price elasticity of demand.

  3. The period under consideration: Price elasticity of demand is greater if you study the effect of a price increment over two years rather than one week.

2. What are the Five Types of Elasticity?

Answer: The types of elasticity are:

  1. Perfectly Elastic Demand: When a small change in product price causes a major change in its demand.

  2. Perfectly Inelastic Demand: When there is no change produced in demand with a change in its product price.

  3. Relatively Elastic Demand: When the proportionate change produced in demand is greater than the proportionate change in price.

  4. Relatively Elastic Demand: When the percentage change produced in demand is less than the percentage change in the price of a product.

  5. Unitary Elastic Demand: When the proportionate change in demand of a product produces the same change in the price.