Price elasticity of demand

The essentials

Price elasticity of demand (ed) measures how much quantity demanded responds to a change in price: ed = (percentage change in quantity demanded) ÷ (percentage change in price) = (ΔQ ÷ Q) ÷ (ΔP ÷ P). Since price and quantity move in opposite directions, ed is negative; we usually quote its absolute value.

Key points

• Perfectly inelastic (ed = 0): vertical demand curve.
• Perfectly elastic (ed = ∞): horizontal demand curve.
• Unitary elastic (ed = 1): rectangular hyperbola; total expenditure stays the same at all prices.
• Elastic (ed > 1) and inelastic (ed < 1).
• Total expenditure method: if price falls and total expenditure rises, demand is elastic; if it falls, inelastic; if unchanged, unitary.
• Point elasticity on a linear curve q = a − bp: ed = b × p ÷ q. Elasticity is greater than 1 above the mid-point, equal to 1 at the mid-point, less than 1 below it, 0 at the quantity axis and ∞ at the price axis.
• Factors affecting elasticity: nature of the good (necessities inelastic, luxuries elastic), availability of close substitutes, share of income spent on the good, number of uses, time period, habits.

Exam tips

• Always use the initial price and quantity as the base for percentage changes, as NCERT does.
• Remember that slope and elasticity are different: a straight-line demand curve has the same slope everywhere but different elasticities.

Common mistakes

• Dividing percentage change in price by percentage change in quantity (the ratio is inverted).
• Thinking a steep curve always means ed < 1 at every point; on a linear curve elasticity changes along its length.