Q.Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

Price Elasticity of Demand: From the Market to Your Pocket

Think about the last time the price of something you buy regularly went up. Maybe it was petrol, or onions, or your favourite snack. Did you stop buying it altogether? Did you buy a little less? Or did you grumble and keep buying the same amount?

That difference in your behaviour is exactly what Price Elasticity of Demand (PED) measures. It answers one simple question: When the price changes, how much does the quantity demanded change?

The Intuition First

Some goods are necessities — things you cannot easily do without. If the price of life-saving insulin rises, a diabetic patient will still buy almost the same amount. Their demand is insensitive to price.

Other goods are luxuries or have close substitutes. If the price of a particular brand of packaged juice doubles, you can easily switch to another brand, or drink water instead. Your demand is sensitive to price.

PED is just a number that captures this sensitivity. It tells sellers and policymakers: "If you change the price by 1%, by what percentage will the quantity demanded change?"

The Precise Definition (NCERT Standard)

The NCERT textbook defines Price Elasticity of Demand as:

Or, more formally:

Where:

• $E_d$ = Price elasticity of demand (a pure number, no units)
• $Q$ = Original quantity demanded
• $\Delta Q$ = Change in quantity demanded ($Q_{new} - Q_{old}$)
• $P$ = Original price
• $\Delta P$ = Change in price ($P_{new} - P_{old}$)

The Five Types of Elasticity

The value of $E_d$ tells you the nature of the good:

| Value of $|E_d|$ | Term | What it means | Real-world example |

|---|---|---|---|---|

| $|E_d| = 0$ | Perfectly inelastic | Quantity demanded does not change at all when price changes | Life-saving drugs, salt (in very small quantities) |

| $0 < |E_d| < 1$ | Inelastic demand | Quantity changes by a smaller percentage than price | Petrol, electricity, basic food items |

| $|E_d| = 1$ | Unitary elastic | Quantity changes by exactly the same percentage as price | A theoretical midpoint; rare in real life |

| $1 < |E_d| < \infty$ | Elastic demand | Quantity changes by a larger percentage than price | Luxury cars, branded clothes, restaurant meals |

| $|E_d| = \infty$ | Perfectly elastic | Consumers will buy any amount at a given price, but nothing at a higher price | A farmer selling wheat in a perfectly competitive market |

Why Does This Matter? (The "So What?")

For a business: Elasticity determines what happens to total revenue when you change price.