Types of Elasticity of Demand > Price Elasticity

Price elasticity of demand (PED) measures how much the quantity demanded of a product changes when its price changes. This helps us understand if buyers respond a lot or just a little to price changes—just like how sensitive someone is to spicy food!

• Prof. Marshall’s Definition:
  PED is the ratio of the percentage change in quantity demanded of a commodity to the percentage change in its price.

• Price elasticity of demand measures the responsiveness or sensitivity of the quantity demanded to changes in the price of a commodity. In simple words, it tells us how much the demand changes when the price changes.

\[\mathrm{Ed}=\frac{\%\Delta Q}{\%\Delta P}\]

Where,

• Q = original quantity demanded
• ΔQ = change in quantity demanded
• P = original price
• ΔP = change in price
• Alternate Formula:
                                   \[\mathrm{Ed}=\frac{\Delta Q}{Q}\div\frac{\Delta P}{P}=\frac{\Delta Q}{\Delta P}\times\frac{P}{Q}\]

1. Business Decisions: Pricing, output planning.
2. Monopolist Pricing: Charge higher where demand is inelastic.
3. Wage/Factor Pricing: Union bargaining—inelastic demand for labour allows higher wages.
4. Taxation Policies: Govt. taxes inelastic goods to maximise revenue.
5. International Trade: Helps set tariffs and decide currency devaluation.
6. “Paradox of Plenty”: A Bumper crop can lower farmer income due to low elasticity for basic food.

• PED shows the sensitivity of demand to price changes.
• Values: <1 (Inelastic), 1 (Unitary), >1 (Elastic), 0 (Perfectly Inelastic), ∞ (Perfectly Elastic).
• Essential for business pricing, government taxes, and policy planning.