What is Price Elasticity of Demand?

Price Elasticity of Demand refers to an economic measure which evaluates the change in price of a good against its respective change in demand.

In simple terms:

If the price of a good rises by a certain amount, we can calculate how much demand for that good is likely to rise or fall as a result.

For normal goods - for example a football or a cake - then a rise in price is likely to result in a fall in demand. This is because consumers are less willing to pay more for the same good.

In reverse other more special goods can sometimes benefit from a rise in demand alongside a rise in price. This could include luxury goods which may appear more desirable when sold at a higher price for example.

Additionally we can determine whether the elasticity of a good is Elastic, Inelastic or Unitary depending on how demand changes in response to a change in price.

Elastic Demand : when demand changes MORE than proportiantly to a change in price.

Inelastic Demand: when demand changes LESS than proportiantly to a change in price.

Unitary Demand: when demand changes equally proportiantly to a change in price.

Mathematically this measure can be calculated to provide us with a 'coefficient' or number which indicates that type of price elasticity is occurring. Although you don't need to calculate this number yourself - understanding what the coefficient means is useful for unlocking the higher grades at A-level.

A Coefficient which is >1 signifies elastic demand. A coefficient which is <1 signifies inelastic demand. A coefficient which is equal to 1 signifies unitary demand. (It is important to note that the calculation often means that all coefficients are negative numbers - so it is tradition to ignore the minus sign).