Theory of Consumer Behaviour
Price elasticity of demand
Calculate elasticity from two price-quantity points and along d = a − bp.
Price elasticity of demand (eD) measures how much demand responds to a change in price:
eD = % change in quantity demanded ÷ % change in price
It is negative (price and quantity move opposite ways), so we usually use its absolute value. It has no units.
- If |eD| < 1, demand is inelastic.
- If |eD| > 1, demand is elastic.
- If |eD| = 1, demand is unit elastic.
Example: the price of a pen rises from ₹10 to ₹12 (+20%), and demand falls from 50 to 35 (−30%). |eD| = 30 ÷ 20 = 1.5: elastic.
On a linear demand curve q = a − bp, elasticity is different at every point: eD = −bp ÷ (a − bp). It is 0 where p = 0, 1 at the middle (p = a ÷ 2b), and infinite where q = 0. Geometrically, at any point, |eD| = lower segment ÷ upper segment of the line.
Special shapes:
- a vertical demand curve: eD = 0 (perfectly inelastic);
- a horizontal demand curve: eD = ∞ (perfectly elastic);
- a rectangular hyperbola: eD = 1 everywhere.
Practise this lesson
Questions that get harder as you improve, a Tutor that helps without giving the answer away, and progress you can see. Free for every learner.
No account, no email address. Opens the real product.