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).
- ∆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