What is price elasticity of demand?

Price elasticity of demand measures consumer's demand responsiveness to changes in price. Depending of the type of good, consumers either respond to a change in price by decreasing or increasing demand for the good or service or by doing nothing at all. These goods can vary from price inelastic, meaning consumer's hardly respond to changes in price. To very price elastic, where even small changes in price can cause huge changes in demand. Price elasticity is calculated as percentage change in quantity demanded over percentage change in price.
Let's explore two examples. Our first good will be food which will be a very price inelastic good. The intuition behind this result is that food is a necessity. This explains why even large increases changes in price will not decrease demand by much. A price inelastic good will have an elasticity between 0 and 1. Another example could be cigarettes, as smokers are addicted and will buy cigarettes regardless of the price.
An example of price elastic good could be motor cars. The price elasticity comes from the large availability of substitutes. If a good has many substitutes which are available easily then small changes in price will create large changes in demand. The elasticity of these kinds of goods will be greater than 1.
Draw demand diagrams with different slopes and changes in price and demand.

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Answered by Ruby O. Economics tutor

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