Price elasticity of demand - Definition and Overview

In economics, the price elasticity of demand measures the responsiveness of the quantity demanded of a good to its price. The formula used to calculate the coefficient of price elasticity of demand is

<math>E_d = \frac{%\ \rm{change}\ \rm{in}\ \rm{quantity}\ \rm{demanded}\ \rm{of}\ \rm{product}\ X}{%\ \rm{change}\ \rm{in}\ \rm{price}\ \rm{of}\ \rm{product}\ X}.<math>

Price elasticity of demand is measured as the percentage change in quantity demanded that occurs in response to a percentage change in price. For example, if, in response to a 10% fall in the price of a good, the quantity demanded increases by 20%, the price elasticity of demand would be 20%/(− 10%) = −2.

<math>\frac{0.2}{-0.1}=-2<math> price elasticity

In general, a fall in the price of a good would be expected to increase the quantity demanded, so we would expect the price elasticity of demand to be negative as above. Note that in the economics literature the minus sign is often omitted.

It may be possible that quantity demanded for a good rises as its price rises, even under conventional economic assumptions of consumer rationality. Two such classes of goods are known as Giffen goods or Veblen goods.

Various research methods are used to calculate price elasticity:

• Test markets
• Analysis of historical sales data
• Conjoint analysis

See also

• Elasticity (economics)
• Supply and demand
• Price elasticity of supply
• Income elasticity of demand