The elasticity of demand

To measure how much consumers respond to changes in these variables, economists use the concept of elasticity.

The price elasticity of demand(PED);
Why ??
1. Availibility of close substitutes
2.Necessities versus luxuries
3.Definition of the market
4.Time horizon

Computing the price elasticity of demand;
PED=(%change in quantity demanded)/(%change in price)

Example;

Suppose that 20 percent increase in the price of apple causes the amount you buy fall to 40 percent. Compute as;
PED=40/20=2

Here we know that PED means how much quantity responds to price.

PED>1 is elastic
PED<1 is inelastic (not mean negative)
PED=1 unit elasticity
PED=0 perfectly inelastic



Key to PED; how much, elastic, inelastic