ELASTICITIES OF SUPPLY AND DEMAND
– The percentage change in a variable is the complete change in the variable divided by original level of the variable.
– Thus the price elasticity of demand is also:
2. Interpreting Price Elasticity of Demand Values
1) Due to the inverse relationship between P and Q; EP is -ve.
2) If IEPI > 1, the percent change in quantity is more than the percent change in price. We state that the demand is price elastic.
3) If IEPI < 1, the percent change in quantity is less than the percent change in price. Then we say that the demand is price inelastic.
3. The basic determinant factor for price elasticity of demand is the accessibilty of substitutes.
– Many substitutes demand is price elastic
– Some substitutes demand is price inelastic
Price Elasticities of Demand