The price elasticity of demand is used by economists to measure just how much the demand of a product is affected by changes in its price (Mankiw, 2024). When demand changes considerably in response to a price change, it is said to be elastic. Alternatively, when price changes don’t really change demand, the good is said to be inelastic.
- Price elasticity of demand > 1
- A small percentage change in price causes a larger percentage change in quantity demanded
- Examples include luxury items, non-necessities, and items with many substitutes
- Price elasticity of demand < 1
- A large percentage change in price causes a smaller percentage change in quantity demanded
- Examples included gasoline and medications
- Price elasticity of demand = 1
- The percentage change in price is exactly the same as the percentage change in quantity demanded
Price elasticity of demand has an impact on total revenue. When demand is elastic, decreasing prices increase total revenue. When demand is inelastic, increasing prices increase total revenue.
Mankiw, N. G. (2024). Principles of Economics. Cengage Learning.