The price elasticity of demand, sometimes simply called price elasticity, measures how much the quantity demanded of a good changes when its price changes. The precise definition of price elasticity is:
The percentage change in quantity demanded divided by the percentage change in price.
ED = (percentage change in quantity demanded) / (percentage change in price)
Economic factors determine the size of price elasticities of individual goods. Elasticities tend to be higher when the goods are luxuries, when substitutes are available, and when consumers have more time to adjust their behavior.
When ED > 1, the good has price-elastic demand. In this case a price decrease increases total revenue.
When ED < 1, the good has price-inelastic demand. In this case a price decrease decreases total revenue.
When ED = 1, the good has unit-inelastic demand. Under this condition total revenue stays the same even when the price changes.
When ED = 0, the demand is completely inelastic.
When ED is infinite the demand is completely elastic. Even the tiniest change in price causes a huge change in quantity demanded, so huge that, for all intents and purposes, we can call the response infinite. When demand is perfectly elastic, then no matter how much people are buying, the demand curve will be a horizontal line. The demand for a single brand of salt may fall into this category.
No comments:
Post a Comment