Elasticity is responsiveness of change in dependent variable relative to independent variable
Price elasticity of demand is the responsiveness to change in quantity demanded
relative to change in price
Price elasticity can be calculated as follows
Price elasticity = Precentage change in quantity demand / Precentage change in price (ΔQD% /ΔP%)
Elasticity can be calculated under point elasticity formula and arc elasticity formula
Point elasticity formula estimates the elasticity of given point considering small change in price and quantity
In point elasticity formula, percentage change of price and quantity are calculated relative to initial price and quantity
Even though the slope is constant, quantity and price change from point to point. Elasticity of a linear demand curve that slopes from left to right changes from point to point. Elasticity varies from zero to infinity
Following are three specific situations that have a constant elasticity coefficients throughout the demand curve,
Perfect elastic demand
Perfect inelastic demand
Unitary elastic demand
Arc elasticity formula can be used to calculate the elasticity of a range
Arc elasticity formula considers a big change in price and quantity
In point elasticity formula, percentage change of price and quantity are calculated relative to mean or average value previously and now.
Types of elasticity which derived according to the elasticity formula can be shown below
Zero(0)- Perfect inelastic
Less than one(<1)-inelastic
Equal to one (1)-unitary
More than one(>1)-elastic
Infinity perfect elastic
There is a relationship between price elasticity and consumer outlay/ producer revenue
Since demand function contains the inverse of the slope, elasticity also can be calculated through it.
The consumer outlay can be calculated through multiplying the quantity demanded by the price.
The producer revenue can be calculated through multiplying the quantity sold by the price.
Due to quantity sold being equal to the quantity purchased, production revenue is equal to consumer outlay.
When the price is changed, the consumer outlay is changed according to the type of price elasticity.
There is a positive relationship between change in price of a inelastic good and change in consumer outlay
When the price increases, the consumer outlay increases.
When the price decreases, the consumer outlay decreases.
If the demand of a commodity is unitary, the consumer outlay could not be changed when the price of the commodity is changed.
It would be an inverse relationship between the change in price of a good and change in consumer outlay , if the demand for a commodity is elastic.
When the price increases the consumer outlay decreases.
When price decreases the consumer outlay is increases.
Various reasons affect to determine price elasticity of demand.
The reasons that affect change of price elasticity of demand is defined as determinants of price elasticity and these are mentioned below.
