What is price elasticity of demand?

Definition:

Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to a change in its price. It is defined as:

“The ratio of proportionate change in quantity demanded caused by a given proportionate change in price”.

Formula for calculation:

Price elasticity of demand is computed by dividing the percentage change in quantity demanded of a good by the percentage change in its price.

Symbolically price elasticity of demand is expressed as under:

E_d=

Simple formula for calculating the price elasticity of demand:

E_d   =

Or, E_d _ _

 

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Here:

Ed stands for price elasticity of demand

Q stands for original quantity.

P stands for original price.

Stands for a small change.

Example:

The price elasticity of demand tells us the relative amount by which the quantity demanded will change in response to a change in the price of a particular good. For example, if there is a 10% rise in the price of a tea and it leads to reduction in its demanded by 20% the price elasticity of demand will be:

E_d = -20/+10

E_d -2.0