Coefficients of elasticity of demand

(PED, YED and XED)

  • Elasticity is a number
  • If coefficient is high, it is elastic
  • If it is low, it is inelastic
  • Infinity – perfectly elastic
  • If PED is 0, demand is perfectly price inelastic. The demand curve is vertical. The demand does not change with a change in price.
  • If PED is between 0 and 1, demand is price inelastic. The % change in demand is smaller than the % change in price.
  • If PED is >1, demand is price elastic. Demand responds more proportionately to a change in price.
  • If PED = Infinity, demand is perfectly price elastic. When demand is perfectly elastic, consumers will only buy at one price and no other.
  • If PED is =1, demand is unitary elastic . Total revenue will stay the same. A 1% reduction in demand would lead to a 1% reduction in price.

Relationship between price elasticity and the shape of the demand curve

  • “Elastic PED can be interpreted as consumer being very sensitive to changes in price.
  • Inelastic demand can be interpreted as consumers being sensitive to price changes.
  • Firms use PED to ascertain how to change their prices in order to increase their revenues.
  • PED varies along the demand curve.” (Ultimate Economics)

Law of Demand

  • All goods that obey the law of demand have a downward sloping demand curve from left to right.
  • PED is normally a negative figure, ie. there is an inverse relationship between the quantity demanded and a change in price.
  • If prices increase demand decreases and vice- versa. (ceteris paribus)

Price Elasticity of Demand

PED: Percentage(%) change in quantity demanded of (Good X)divided by/Percentage change in price (Good X).

Price elasticity of demand
  • Q = Change in quantity demanded
  • Q1 = Original quantity demanded
  • Q2 = New quantity demanded after price change
  • ∆P = Change in price
  • P1 = Original price
  • P2 = New price 

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