Please explain what price elasticity of demand is, in the context of simple supply and demand of a good in a competitive market.

Price elasticity of demand is a fundamental concept in microeconomic theory. By taking the first and second derivatives of a demand function with respect to price (finding the partial derivative by differentiation with respect to price or by dividing the percentage change in quantity demanded by the percentage change in price), you can see how the demand for a good changes, as its price changes. This can indicate what type of good the good in question is. For example, if the price elasticity of demand (ped) is negative, then the good is a normal good. Furthermore, when a good has a low ped (i.e. between 0 and 1) then the good is inelastic. This means that irrespective to the changes in price, the demand will be relatively unchanged. Conversely, a good which has a high elasticity (i.e. ped > 1) then the demand is very sensitive to changes in price. For example, if a seller of kiwis increased the price by 20%, the demand for those kiwis will fall by more than 20%, say 50% (depending on the ped coefficient).

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Answered by Olivia F. Economics tutor

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