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Price elasticity of demand (1 Viewer)

nightweaver066

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Price elasticity of demand is the percentage change in quantity demanded that results from a 1 percent change in price of the good/service.

Say we had a highly elastic good that was selling for 10 units for $10 each. If we increased the price to $11, the quantity demanded could drop down to 2 units, as it is highly elastic.

Now, what if this good was highly inelastic? So this means that a 1 percent change in price will lead to a relatively small change in quantity demanded. So if we were to increase the price to $11, the quantity demanded could drop down to say, 9 units.

Notice how the changes in quantity demanded that result from changes in price are linked to the price elasticity of demand.
 

Kurby

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Taking what nightweaver said ^ in very simple terms:

Elastic: (food or vegetable or something)
Price down, MAKE BIG MONEY!
Price up, LOOSE BIG MONEY

Inelastic: (electricity, gas, water)
Price down, LOOSE BIG MONEY!
Price up, MAKE BIG MONEY!
 

RishBonjour

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Price elasticity of demand is the percentage change in quantity demanded that results from a 1 percent change in price of the good/service.
So basically, if a good was elastic, and there was a 1% INCREASE in price, it would lead to a GREATER than 1% decrease in demand (for all normal goods)

If it was inelastic, that 1% increase in price would lead to a LESS than 1% decrease in demand

And then you can relate it to revenue which is exactly what 'Kurby' said, but I don't think that is tested (good to know anyway).

To really get it on your own, I suggest drawing up a demand/supply diagram. The flatter the demand curve, the greater the price elasticity of demand. Just change price/quantity and see how it changes each variable, it will make it very clear.
 

Girls

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When thinking about the theoretical extremes, i.e. complete inelasticity, think of something like a medicine that cures cancer patented by one pharmaceutical company. If they put the price up by 1%, or 10%, or 50%, there will practically be no drop in Q demanded, as it is essentially a necessity for life. Also consider ultra-rare items. e.g. the Mona Lisa would still be in high demand no matter how much the seller decides to inflate the price.

Elasticity is highly affected by necessity, rarity and the availability (or lack thereof) of complementary goods.
 

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