Price elasticity of demand

In economics, the price elasticity of demand (PED) is an elasticity that measures the responsiveness of the quantity demanded of a good to its price. The formula used to calculate the coefficient of price elasticity of demand is

Related Topics:
Economics - Elasticity - Demand - Good - Price

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:E_d = rac{% m{change} m{in} m{quantity} m{demanded} m{of} m{product} X}{% m{change} m{in} m{price} m{of} m{product} X}.

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Price elasticity of demand is measured as the percentage change in quantity demanded that occurs in response to a percentage change in price. For example, if, in response to a 10% fall in the price of a good, the quantity demanded increases by 20%, the price elasticity of demand would be 20%/(− 10%) = −2.

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:rac{0.2}{-0.1}=-2 price elasticity

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In general, a fall in the price of a good is expected to increase the quantity demanded, so the price elasticity of demand is negative as above. Note that in the economics literature the minus sign is often omitted and the elasticity is given as an absolute value. Because both the denominator and numerator of the fraction are percent changes, price elasticities of demand are dimensionless numbers and can be compared even if the original calculations were performed using different currencies or goods.

Related Topics:
Absolute value - Dimensionless number - Currencies

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It may be possible that quantity demanded for a good rises as its price rises, even under conventional economic assumptions of consumer rationality. Two such classes of goods are known as Giffen goods or Veblen goods.

Related Topics:
Consumer rationality - Giffen goods - Veblen good

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Various research methods are used to calculate price elasticity:

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• Test markets
• Analysis of historical sales data
• Conjoint analysis
 
Price elasticity of demand: Elasticity and revenue ►