What is Price elasticity of demand?

A company sells good at the price of Rs 450. The firm has decided to reduce the price
of good to Rs 350.Consequently, the quantity demanded for the good rose from
25,000 units to 35,000 units. Calculate the price elasticity of demand.
Answer:
Price elasticity of demand can be defined as the ratio of the percentage
change in quantity demanded to the percentage change in price.

Price Elasticity of Demand = Percentage change in quantity demanded

Percentage change in price

Thus, the formula for calculating the price elasticity of demand is as

follows:

Where,
ep = Price elasticity of demand

P = Initial price
P = Change in price

Q = Initial quantity demanded

Q = Change in quantity demanded
Let us consider different values for price elasticity of demand (PED):-
1. If PED = 0 demand is perfectly inelastic. It means that demand does not change at all when the
price changes and hence the demand curve will be vertical.

2. If PED is between 0 and 1 (i.e. the % change in demand from A to B is smaller than the
percentage change in price), then demand is inelastic. The demand curve of inelastic demand
is rapidly sloping.
3. If PED = 1 (i.e. the % change in demand is exactly the same as the % change in price), then
demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving
total spending the same at each price level. The demand curve for unitary elastic demand is a
rectangular hyperbola.

4. If PED > 1, then demand responds more than proportionately to a change in price i.e. demand
is elastic. For example if a 10% increase in the price of a good leads to a 30% drop in demand.
The price elasticity of demand for this price change is –3. In perfectly elastic demand, the
demand curve is represented as a horizontal straight line (in parallel to x-axis)
 Types of Price elasticity of Demand (PED)
PED Value Type of PED Condition
Infinity Perfectly elastic demand Greater change in demand in response to percentage or smaller change in
the price.
0 Perfectly inelastic demand No change in demand in response to percentage or smaller change in the
price.
>1 Relatively elastic demand A change in demand is greater than the change in price.
<1 Relatively inelastic demand A change in demand is less than the change in price.
1 Unitary elastic demand A change in demand is equivalent to change in price.

Here, as per given data in the question:-

Initial Price P = Rs 450

There is a fall in the price from Rs 450 to Rs 350.

Hence P = (Rs 450 – Rs 350) = Rs 100

Initial Quantity Q = 25,000 units
Change in Quantity ∆Q = (35,000 – 25,000) = 10,000

By substituting these values in the above formula, we get:

e p = (10000 X 450) / (100 X 25000)

= 4500000 / 2500000

=9/5

= 1.8

Thus, the absolute value of elasticity of demand is greater than 1.