Price Elasticity of Demand (E P )
• Price elasticity of demand is a measure of how much
the quantity wanted of a commodity responds to a
change in its price.
• The percentage change in quantity demanded as a
result of a price change is referred to as price elasticity
of demand.
,The Price Elasticity of Demand and Its
Determinants
1. Availability of Close Substitutes
• The more substitutes that are available, the more similar they are.
• Demand for goods with near substitutes is more elastic since it is easier for buyers to switch
items.
2. Necessities versus Luxuries
• Luxuries good is more elastic than necessity goods
3. Proportion of income
• When a consumer spends a lot of money on a product, demand tends to be more price elastic.
,The Price Elasticity of Demand
and Its Determinants
4. Time Horizon
• Demand for goods tends to be more elastic over a longer time horizon.
Demand tends to be more elastic:
• the closer alternatives there are, the better.
• if the product is a luxury.
• if the market is more tightly defined.
• the longer the time period, the better.
, Computing the Price Elasticity
of Demand (E P )
The price elasticity of demand is calculated by dividing the percentage change in quantity
demanded by the price change.
Percentage change in quantity demanded
Price elasticity of demand =
Percentage change in price
• Price elasticity of demand is a measure of how much
the quantity wanted of a commodity responds to a
change in its price.
• The percentage change in quantity demanded as a
result of a price change is referred to as price elasticity
of demand.
,The Price Elasticity of Demand and Its
Determinants
1. Availability of Close Substitutes
• The more substitutes that are available, the more similar they are.
• Demand for goods with near substitutes is more elastic since it is easier for buyers to switch
items.
2. Necessities versus Luxuries
• Luxuries good is more elastic than necessity goods
3. Proportion of income
• When a consumer spends a lot of money on a product, demand tends to be more price elastic.
,The Price Elasticity of Demand
and Its Determinants
4. Time Horizon
• Demand for goods tends to be more elastic over a longer time horizon.
Demand tends to be more elastic:
• the closer alternatives there are, the better.
• if the product is a luxury.
• if the market is more tightly defined.
• the longer the time period, the better.
, Computing the Price Elasticity
of Demand (E P )
The price elasticity of demand is calculated by dividing the percentage change in quantity
demanded by the price change.
Percentage change in quantity demanded
Price elasticity of demand =
Percentage change in price
