Essay: What is Price Elasticity of Demand

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Essay: What is Price Elasticity of Demand

Sample Essay

Price elasticity of demand is the responsiveness of quantity demanded as a result of change in price. It is measured in percentage terms to show the amount of change in quantity demanded as price changes by one unit.  It usually is a negative figure except for giffen and vebeln goods, which result to a positive price elasticity of demand (Arnold, 2008). Although there are, other factors that influence demand, in computing price elasticity of demand, those other factors are held constant so as to easily compute the figure by assuming that all the change seen in the quantity demanded I sonly caused by the change in price.

Price elasticity of demand can either be termed as being relatively inelastic, relatively elastic or unitary. Relatively inelastic implies hat here is relatively very little change in demand as price changes usually PED resulting to less than one. When on the other hand, PED is equal to more than one in absolute terms, the price elasticity of demand is said to be relatively inelastic. This implies that a small change in price of the product in question leads o a very large change in the quantity demanded. It should be noted that price changes positively while demand changes negatively.

Unitary price elasticity of demand is the case in which both the price and quantity demanded of the product in question changes by the same value. This implies that when piece changes by ten units, quantity demanded will also change by ten units. When PED is exactly equal to one, it is assumed that revenue is maximized at that point. PED is also used to measure the burden of tax of the specific product in question.

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