Glossary term
Price Elasticity of Demand: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
Price elasticity of demand measures how much the quantity demanded of a good changes when its price changes. It equals the percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when its absolute value is above one, inelastic below one, and unit elastic at one.
In more detail
Elasticity tells a seller what happens to revenue when price changes. If demand is elastic, a price cut raises revenue; if inelastic, a price rise does. Goods with close substitutes, a large share of the budget and a long time to adjust tend to have more elastic demand than necessities with few substitutes.
Example
If the price of a good rises 10% and the quantity demanded falls 20%, the elasticity is −2, so demand is elastic. A seller who raises price in this case will see total revenue fall.
Key points
- It is a pure number and does not depend on units.
- On a straight-line demand curve it varies from zero to infinity.
- Elastic demand: expenditure moves opposite to price.
Common mistake
Quoting the slope of the demand curve as elasticity. Slope and elasticity are different.
Related terms
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 2: Theory of Consumer Behaviour.