What is price elasticity of demand and how does it affect equilibrium prices and quantities?

Price elasticity of demand is a measure of the relationship between the quantity demanded for a good and the price of that good. We are more concerned with the coefficient of the change and not the direction as mostly it will be negative, as price and quantity often move in opposite directions. If a good is said to be inelastic then a subsequent increase in price would not lead to a large decrease in the quantity demanded. This would include goods that are necessities. If a good is said to be elastic then a subsequent increase in price would lead to a large decrease in the quantity demanded. Could include luxury goods. Price elasticity of demand is usually between 0 and 1. If it is = 0 then it is perfectly inelastic and if it is = 1 then it is perfectly elastic. Drawn on a graph a more inelastic curve is steeper than an elastic demand curve. It is calculated by finding the difference in the quantities demanded before and after the change and the difference in price before and after the change. Divide the difference in Quantity / difference in price.

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Answered by Josh M. Economics tutor

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