Price Elasticity of Demand

Before we start, lets clear something out:


The higher the S, the lower the D is (like the more carrots they have in the shop, the cheaper they are).

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NOW:



The slope of the curve shows the elasticity by:

% change in quantity

---------------------- <--this is a divsion like 1÷2= 1/2

% change in price

IT IS HOW RESPONSIVE DEMAND IS TO A CHANGE IN PRICE

Price Elastic:

If you have an answer>1, then demand is very sensitive to price. This means a small change in price leads to a big change in demand.

You have a product, you sell it $1000. Then you decided to make it cheaper and lower the price by 7%. Then the people purchase it increased by 28%.
28%÷7%= 4

In other words, PEOPLE WANT TO BUY THEM WHEN THEY ARE CHEAP.

SO THE DEMAND IS SAID TO BE PRICE ELASTIC.

Think Gucci and Burberry. And the old ladies trying to look expensive. No offence.

Price Inelastic:

If you have an answer<1,>

This means a big change in price leads to only a small change in demand.

You have a product. You sell it $1000.

You lower the price by 50% and the demand increased by 25%.

25%÷50%= 0.5

Therefore it is sensible to put the price up.

In other words, THEY DON'T GIVE A DARN ABOUT THE PRICE.

SO THE DEMAND IS SAID TO BE PRICE INELASTIC