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Review key Price Elasticity of Demand: Formula, Degrees of Elasticity & Consumer Economics exam facts and rate your mastery to track revision.
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#1
Price Elasticity of Demand (PED) measures the percentage change in quantity demanded resulting from a given percentage change in the price of a good.
#2
The mathematical formula for PED is the percentage change in quantity demanded divided by the percentage change in price: Ed = (%ΔQ) / (%ΔP).
#3
Alfred Marshall formalized the mathematical measurement of elasticity in his 1890 work Principles of Economics.
#4
Because price and quantity demanded move in opposite directions, the elasticity coefficient is negative, though economists conventionally express it in absolute terms (|Ed|).
#5
There are five distinct degrees of price elasticity of demand: perfectly inelastic, inelastic, unitary elastic, elastic, and perfectly elastic.
#6
Perfectly inelastic demand (Ed = 0) is represented by a vertical demand curve, meaning quantity demanded remains constant regardless of price (e.g., insulin or life-saving medicine).
#7
Inelastic demand (Ed < 1) occurs when the percentage change in quantity demanded is less than the percentage change in price, typical of essential goods like salt, cooking gas, and staple grains.
#8
Unitary elastic demand (Ed = 1) is represented geometrically by a rectangular hyperbola curve, where total expenditure remains constant as price changes.
#9
Elastic demand (Ed > 1) occurs when quantity demanded changes by a larger percentage than the price shift, characteristic of luxury goods and products with abundant substitutes.
#10
Perfectly elastic demand (Ed = ∞) is represented by a horizontal demand curve, characteristic of individual firms operating in theoretical perfectly competitive markets.
#11
The availability of close substitutes is the primary determinant of elasticity; goods with numerous available alternatives exhibit significantly higher price elasticity.
#12
Goods that absorb a negligible fraction of consumer income (such as matchboxes or safety pins) exhibit highly inelastic demand.
#13
Demand is generally more inelastic in the short run and becomes more elastic in the long run as consumers locate substitutes and adjust consumption habits.
#14
Under Alfred Marshall's Total Outlay (Total Expenditure) Method, demand is elastic if total spending moves inversely to price, and inelastic if total spending moves in the same direction as price.
#15
Point elasticity calculates elasticity at a specific coordinate on a linear demand curve using the geometric formula: Ed = Lower Segment / Upper Segment.
#16
Firms possessing market power utilize price elasticity to practice price discrimination, charging higher prices in inelastic market segments and lower prices in elastic segments.
#17
The Ramsey Rule of taxation states that to minimize economic deadweight loss and raise revenue, governments should impose higher tax rates on commodities with inelastic demand.
#18
Tax incidence theory demonstrates that when demand is relatively more inelastic than supply, consumers bear the predominant economic burden of indirect commodity taxes.
Subject Specialist Commentary
Analytical perspective & practical exam advice from the Master10 academic board
Price elasticity of demand measures how much consumer demand responds when the price of a good changes. Formalized by Alfred Marshall in 1890, it calculates the percentage change in quantity demanded divided by the percentage change in price. When buyers sharply reduce purchases following a modest price hike, demand is elastic, typical of luxury goods with close substitutes. When purchases remain steady despite price jumps, demand is inelastic, characteristic of essential goods like salt, cooking gas, and medicines.
For UPSC Prelims, SSC CGL, and State PSC exams, mastering elasticity degrees and demand curve shapes is essential. A common trap involves curve geometry: perfectly inelastic demand (Ed = 0) is a vertical line, whereas perfectly elastic demand (Ed = infinity) is horizontal. Unitary elastic demand (Ed = 1) forms a rectangular hyperbola where total consumer expenditure remains unchanged. Remember the shape mnemonic "V-Zero, H-Infinity": Vertical lines represent zero elasticity, while Horizontal lines show infinite elasticity.
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