Price Elasticity of Demand
The law of demand gives direction; price elasticity of demand measures response size:
is elastic, inelastic, and unit elastic. Elasticity is unit-free, allowing comparisons across goods.
Determinants
More substitutes, a narrower market definition, a larger budget share, and more adjustment time usually make demand more elastic. Necessities tend to be less elastic and luxuries more elastic, but these are hypotheses to test with data.
Equal price changes can produce unequal responses
A medicine price falls 10% and use rises 2%; an entertainment subscription falls 10% and users rise 25%. Both obey demand's direction, but their responsiveness differs. Percentages make quantities and currencies comparable.
| Absolute elasticity | Classification | Response to a 10% price change |
|---|---|---|
| 0 | perfectly inelastic | 0% |
| between 0 and 1 | inelastic | less than 10% |
| 1 | unit elastic | about 10% |
| above 1 | elastic | more than 10% |
Ask about substitutes, market breadth, budget share, and adjustment time. “Food” is broad; one cereal brand is narrow. Gasoline users have few immediate options but can change vehicles or commutes over years. Elasticity therefore belongs to a population, interval, and horizon—not permanently to a product.
The price rope garden
Unlock the complete interactive lab, deeper explanations, and curated reference answers.
Slope and elasticity are not identical. Elasticity uses percentages and changes along a linear demand curve. Also distinguish movement caused by price from a shift in demand.
KNOWLEDGE QUIZ
Three shops, one price experiment
Three simulated shops each sell 100 units at price 10. Each raises price to 11 under controlled conditions. Use original-value percentages in this exercise; the next section contrasts the midpoint convention.
New quantities: staple 98; restaurant meals 90; one snack brand 82.
- Compute percentage price and quantity changes and classify elasticity in each market.
- Compute old and new revenues and relate changes to elasticity.
- Suggest two reasons for different responses and one reason the experiment cannot establish a permanent coefficient.