Question

Define the term price elasticity of demand.

What is price elasticity of demand?

Answer 1

The degree of responsiveness of quantity demanded due to changes in the price of the commodity is known as price elasticity of demand.

Answer 2

Price elasticity of demand tells us the amount of the change in the quantity demanded of a commodity in response to change in its price. In other words, it measures the degree of change of demand in response to changes in price. It indicates how consumers react to changes in price. The greater the reaction, the larger will be the elasticity; the lesser the reaction, the smaller will be the elasticity.

Example: If the prices of milk and wheat both rise by 15 per cent and, consequently, their demands fall by 30 per cent and S per cent respectively, the demand for milk is said to be more elastic and demand for wheat is less elastic. Alfred Marshall was the first economist to develop the concept of price elasticity of demand as the ratio of a relative change in quantity demanded to a relative change in price. A relative measure is needed so that changes in different measures can be compared. These relative changes in demand and price are measured by percentage change. The percentage changes are independent of units. It can be written as

Formula:

E_d = `("Percentage change in demand for the good")/("Percentage change in price of the good")`

Thus, elasticity of demand is the ratio between the percentage change in demand and percentage change in price. In other words, it is the percentage change in the quantity demanded per one percent change in price.