Price elasticity of demand

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Updated: Aug 20, 2021

Defined in general terms as a measure of degree of responsiveness of one variable to changes in another. Thus the price elasticity of demand is the degree of responsiveness of the quantity demanded of a good to changes in its price.

Income elasticity of demand refers to the responsiveness of the quantity demanded of a good to changes in income of consumers; price elasticity of supply is the responsiveness of the quantity of a good supplied to change in its price. Numerically, it is given by the proportionate change in the dependent variable, e.g. quantity demanded or quantity supplied, divided by the proportionate change in the independent variable, e.g. price or income, which brought it about. The resulting elasticity measure is thus a pure number, independent of units, and its magnitude can be readily compared for things measured in different units. For example, the price elasticity of demand for cornflakes is greater than that for Rolls-Royce motor cars, if the elasticity measure for the former is 2 (i.e. a 10 per cent fall in price increases demand for cornflakes by 20 per cent) and that for the latter is 1 (i.e. a 10 per cent fall in price causes an increase of 10 per cent in quantity). It obviously means more to say that the demand for cornflakes is more responsive to change in its price than the demand for Rolls-Royce motor cars on the basis of this measurement than on the basis of absolute price and quantity changes. Since elasticity is a measure of responsiveness of one variable to changes in another, it is implicit in the shape of the demand curves, supply curves and cost curves used by the economist. Elasticity can be measured in two ways: Arc elasticity or Point elasticity.

Reference: The Penguin Dictionary of Economics, 3rd edt.


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