Price elasticity of demand

Elastic demand means that the quantity demanded is very sensitive to a change in price. A small price change leads to a relatively larger change in quantity demanded. Elastic goods typically have PED > 1.

Inelastic demand means that the quantity demanded is not very sensitive to a change in price. A change in price leads to a relatively smaller change in quantity demanded. Inelastic goods typically have PED < 1.

Unit elastic demand means that the percentage change in quantity demanded is equal to the percentage change in price. The PED value is equal to 1.

PED = (% Change in Quantity Demanded) / (% Change in Price). Remember to use percentage changes for both numerator and denominator to get an accurate elasticity value.

If demand is elastic, a firm may choose to lower prices to increase total revenue. If demand is inelastic, a firm may choose to increase prices to increase total revenue. This is because the change in quantity will be proportionately less than the change in price.

If demand is elastic, a price decrease will increase total revenue, and a price increase will decrease total revenue. The opposite is true for inelastic demand: a price increase will increase total revenue.

Goods with many close substitutes tend to have more elastic demand. Consumers can easily switch to a different product if the price increases.

Necessities tend to have inelastic demand because people will continue to buy them even if the price increases. Luxuries tend to have elastic demand because people can easily postpone or forgo the purchase if the price increases.

The number and closeness of substitutes, and whether the good is a necessity or a luxury. A product with lots of substitutes that is considered a luxury will have a high PED. A product with few substitutes that is considered a necessity will have a low PED.