Business Economics · Ch 2 — Demand Analysis
Price Elasticity of Demand — Concept and Types
Price Elasticity of Demand — Concept and Types
The Law of Demand tells us that a fall in price raises quantity demanded, but not by how much. Two goods may both obey the law yet respond very differently — a small price cut may raise the sales of one enormously and of another hardly at all. Elasticity of demand measures the degree of responsiveness of quantity demanded to a change in one of its determinants. When the determinant is the good's own price, we speak of price elasticity of demand (), defined as the ratio of the proportionate change in quantity demanded to the proportionate change in price:
Because price and quantity move in opposite directions, is strictly a negative number; by convention we usually report its absolute (numerical) value, dropping the minus sign, and read only its size.
The five degrees (types) of price elasticity:
| Type | Value of | Meaning | Curve shape |
|---|---|---|---|
| Perfectly inelastic | Quantity demanded does not change at all when price changes | Vertical straight line | |
| Inelastic (relatively) | Quantity changes less than proportionately to price | Steep curve | |
| Unitary elastic | Quantity changes exactly in proportion to price | Rectangular hyperbola | |
| Elastic (relatively) | Quantity changes more than proportionately to price | Flat curve | |
| Perfectly elastic | Buyers take any amount at the ruling price; none at a higher price | Horizontal straight line |
The ratio of the percentage change in quantity demanded to the percentage change in the g …
Demand for which the percentage change in quantity exactly equals the percentage change in p …
Demand that does not respond at all to a price change (E_p = 0); the demand curve is …