Price Elasticity of Demand

6. Principles of Economics

Suppose the price elasticity of demand for text books is two and the price of the text book is increased by 10%. By how much does the quantity demand fall? Inter the result and discuss reasons for the fall in quantity demand?

Definition of Elasticity of Demand:

Price elasticity of demand may be defined as the change in the quantity demanded in response to a change in price of a commodity. The formula for calculating price elasticity of demand is:

Percentage change in the demand for product A

Ep= ----------------------------------------------------------------------------------------

Percentage change in the price of product A

Using the above equation for analyzing our problem;

Given Price Elasticity of Demand for our Text Book (Ep) = 2

Given %age change in price = 10%

Thus fall in quantity demand will be = 2 x 10% = 20 %

We can infer that the demand for the text book is largely elastic. An increase in price of 10% will result in fall of demand by 20%.

This price elasticity of demand indicates the following:

Existence of Substitutes

The most important factor on which elasticity of demand for product depends is the existence of substitutes for the product. The Price elasticity of demand is indicative that substitute of the text book is readily available in market.

Durability of the Commodity

As the text book is required for the course period only, the durability is low and customer is more likely to make a decision on basis of price if alternatives are available.