Price Elasticity of Demand

Price elasticity of demand is the percentage change in quantity demanded due to the percentage change in price other things remaining the same. It is calculated as;

Ep= Percentage change in quantity demanded/Percentage change in price

Ep=Q2-Q1/P2-P1*P1/P1

Here,

Ep= Coefficient of price elasticity of demand

Q₁= Initial Quantity Demanded

Q₂= New Quantity Demanded

P₁= Initial Price

P₂= New Price

There are five types of price elasticity of demand;

1. Perfectly Elastic Demand:

If the quantity demanded increases infinitely due to negligible change in price then it is called perfectly elastic demand. It is expressed as; Ep= ∞

In the above figure, quantity demanded is measured along the x-axis, and price is measured along the y-axis respectively. When the price is about to fall from the OP price level then the quantity demanded increases infinitely from OQ₁ to OQ_2, which is called perfectly elastic demand.

2. Perfectly Inelastic Demand:

Perfectly elastic demand is the percentage change in price remaining the quantity demanded unchanged. It is expressed as; Ep=0

In the above figure, quantity demanded is measured along the x-axis, and the price is measured along the y-axis respectively. When the price increases from OP₁ to OP to OP_2, then the quantity demanded remains unchanged at OQ quantity.

3. Relatively Elastic Demand:

If the percentage change in quantity demanded is more than the percentage change in price then it is called relatively elastic demand. It is expressed as; Ep>1.

In the above figure, Quantity demanded is measured along the x-axis, and price is measured along the y-axis respectively. When the price decreases from OP1 to OP by 5%, then the quantity demanded increases by 10% which is called relatively elastic demand.

4. Relatively Inelastic Demand:

If the percentage change in quantity demanded is less than the percentage change in price then it is called relatively inelastic demand. It is expressed as; Ep<1.

In the above figure, quantity demanded is measured along the x-axis and price is measure along the y-axis respectively. In the above figure, when the price falls from OP to OP₁ by 10% then the quantity demanded increases from OQ to OQ₁ by  5% which is called relatively inelastic demand.

5. Unitary Elastic Demand:

If the percentage change in quantity demanded is equal to the percentage change in price, then it is called unitary elastic demand. It is expressed as; Ep=1.

In the above figure, quantity demanded is measured along the x-axis and price along the y-axis respectively. When the price falls from OP to OP₁ to OP then the Quantity demanded increases from OQ to OQ₁ which is called unitary elastic demand.