The measure of relative responsiveness of quantity demanded to price along a given demand curve is known as price elasticity of demand. According to R.G. Lipsey, “The Elasticity demanded to a percentage change in price.”
Albert L. Meyers has defined elasticity demand in these words. “The elasticity of demand is a measure of relative change in the amount purchased in response to a relative change in price on a given demand curve. In the words of Prof. Marshall, “The elasticity of demand in a market is great or small according as the quantity demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in the price. “The change in quantity demanded due to a change in price is known as elasticity of demand or more correctly price elasticity of demand. If a given percentage change in price brings about a large percentage change in quantity demanded, the demand for the product is said to be elastic. On the other hand, if a given percentage change in price brings about a smaller percentage change in quantity demanded, the demand for the product is said to be inelastic. Thus price elasticity of demand may be defined as the change in quantity demanded in response to a change in the price of a commodity. The formula for calculating price elasticity is:
The demand for the product depends not only on the price of the commodity but also upon the level of income of consumers and the prices of related goods.
To know the responsiveness of the quantity demanded to change in the price, we measure the price elasticity of demand. As all goods are not equally responsive to price changes, price elasticities for different goods are different. Price elasticity of demand is defined as the percentage change in quantity demanded resulting from one percent change in the price of the good, other things remaining constant. It can also be denoted as:
It can be observed that the quantity demanded decreases when the price increases and this ratio is negative. However, the absolute value is usually taken and hence Price Elasticity of demand is shown as a positive number. Suppose that the Bus fares are increases by 6% and the demand for rail travel decreases by 2%.
As the elasticity measure is a proportion of two percentages, it is unit-free.
Let us suppose that you are a whole seller of bulbs. You know that the price elasticity of demand remains unchanged and is equal to 1.5. And the price has increases by 20%. To know the amount of decrease of quantity demanded that will be due to the increase in price we can use the above formula as follows:
Or, Percentage change in quantity demanded =1.5 × 20%
So, in this way, we can predict the expected change in quantity demanded due to price changes if we can estimate the price elasticity of demand. Similarly as we can also forecast the required change in price, when we want to realize a targeted change in quantity demanded and knows the price elasticity of demand.
Extending the calculations of price elasticity of demand (ep) we have
% Change in quantity demanded