Price Elasticity of Demand

Have you ever noticed that some products continue to sell even when their prices rise, while others see an immediate drop in demand? For example, if the price of salt increases, most people still buy the same amount. But if apples become expensive, many of us reduce our purchases.

This difference in how consumers respond to price changes is known as Price Elasticity of demand. It is one of the most important concepts in economics, and it affects businesses, markets, and everyday purchasing decisions.

What Does “Elasticity of Demand” Mean?

Elasticity simply refers to responsiveness.

So, elasticity of demand means how much the quantity demanded of a product changes when something else changes, such as:

• Price

• Income

• Price of related goods

Among these, price elasticity is the most widely used and studied.

Price Elasticity of Demand (PED): The Core Idea

Price Elasticity of Demand measures how strongly consumers change their buying habits when the price of a product changes.

The formula is:

Percentage change in quantity demanded ÷ Percentage change in price

This may look technical, but the idea is straightforward. If the quantity demanded changes sharply with price, the demand is elastic. If demand hardly changes, it is inelastic.

Example:If price decreases by 10 percent and demand increases by 20 percent, elasticity is 2. This means the product has elastic demand.

Types of Price Elasticity of Demand

Here are the major types, explained in a simple way:

1. Perfectly Inelastic (ed = 0)

Demand does not change at all when price changes.Example: life-saving medicines, salt.

2. Inelastic or Less Than One (ed < 1)

Demand changes, but not by much.Example: petrol, milk, basic food items.

3. Unit Elastic (ed = 1)

Demand changes in the same proportion as price.If price increases by 10 percent, demand falls by 10 percent.

4. Elastic or Greater Than One (ed > 1)

Demand changes more than the price change.Example: luxury goods, restaurant meals, gadgets.

5. Perfectly Elastic (ed = ∞)

Any small change in price causes consumers to stop buying completely.

Why Does Elasticity Matter?

Elasticity is important because it helps in decision-making for businesses, governments, and consumers.

Businesses use it to:

• Set the right price

• Plan discounts

• Understand customer behaviour

• Estimate future sales
  

Governments use it to:

• Decide tax rates

• Predict tax revenue

• Plan subsidies and welfare schemes
  

As consumers, elasticity influences what we buy, when we buy, and how much we spend.