Price Elasticity of Demand | Theory of Consumer Behaviour | Ecoholics

Price elasticity of demand measures how the change in a product’s price affects its associated demand. Now you can measure the price elasticity of demand (PED) mathematically as follows:

Price Elasticity of Demand (PED) = % change in quantity demanded / % change in price

Coefficient of Price Elasticity
Economists measure the price elasticity of demand (PED) in coefficients. In response to the change in price, demand for a product can be elastic, perfectly elastic, inelastic, or perfectly inelastic based on the coefficient.
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Perfectly Inelastic (PED = 0)
When the price elasticity of demand or PED is zero, then the demand is perfectly inelastic. That is, there is no change in the quantity demanded in response to the change in price. The demand curve remains vertical. Demand is completely unresponsive to the change in price.

Inelastic (PED is between 0 and 1)
If the percentage of change in demand is less than the percentage of change in price, then the demand is inelastic. For instance, let us say that the price of a chocolate increases from Rs.10 to Rs.20 and the associated demand decreases from ten chocolates to five chocolates. So now the PED will be 50% divided by 100%, which is 0.5. Hence, the demand here is inelastic.

Elastic or Unit Elastic (PED = 1)
When the percentage of change in demand is the same as the percentage of change in price, then the demand is unit elastic. For example, let us say that the price of a candy drops from Rs.10 to Rs.5 and the demand increases from 10 candies to 15 candies. Here, the percentage of change in demand is equal to the percentage of change in price (50% divided by 50%, which is 1).

Perfectly Elastic (PED is greater than 1)
If the percentage of change in demand is more than the percentage of change in price, then the demand is perfectly elastic. For instance, if a 10% increase in price causes a 20% drop in demand, then the coefficient of PED is 3, which means that the demand is perfectly elastic.

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