Price Elasticity of Demand, (ε), known more simply as the elasticity of demand, denotes the extent to which shifts in the price of a good change the quantity of which is demanded of the good.
Suppose that the given demand curve of a particular good is represented by the linear equation, Qd = A – Bp, where A represents the y-intercept of the demand curve, B represents the slope of the demand curve, and p represents the given equilibrium price of the good. For example, if the demands curve for oil can be represented by the linear equation,
Qd = 300 – 10.1p
and the price of oil is determined to be, p = $68, under the given demand and supply curves.
The following would be inputted into the equation calculator above to determine the price elasticity of demand (ε) for this particular good;
| A | 300 |
|---|---|
| B | 10.1 |
| p | 68 |
Explanation
Using the equation and calculator above, you are able to calculate the price elasticity of demand (ε). In inputting the numbers above we get that ε = -1.77, what this represents is that for every 1% increase in the price of oil you can expect a proportional decrease of 1.77% in the quantity demanded of the good. The price elasticity of demand (ε) can be characterized even further based on what the elasticity value is calculated to be.
If ε = 0, it can be said the demand for the good is 'perfectly inelastic'
-1 < ε < 0, demand for the good is 'inelastic'
ε = -1, demand for the good is 'unitary elastic' which means proportional changes in demand in regards to changes in price
ε < -1, demand for the good is 'elastic'
ε = -∞, eg. -1000, demand for the good is 'perfectly elastic
Perloff, Jeffrey. Microeconomics. Boston, MA: Pearson Education, 2011. Print.