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Video:How to Interpret the Price Elasticity of Demand

with Ronnie Garrison

The price elasticity of demand is used to see how sensitive the demand for a good is to a price change. Here is how to interpret the price elasticity of demand.See Transcript

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Transcript:How to Interpret the Price Elasticity of Demand

Definition of Price Elasticity of Demand

The price elasticity of demand is used to see how sensitive the demand for a good is to a price change. The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand.

Interpreting Price Elasticity of Demand

Often an assignment or a test will ask you a follow up question such as "Is the good price elastic or inelastic between $9 and $10?" To answer that question, you use the following rule of thumb: If the Price Elasticity of Demand is greater than 1, then Demand is price elastic, or the demand is sensitive to price changes. If the Price Elasticity of Demand is equal to 1, then Demand is unit elastic. If the Price Elasticity of Demand is smaller than 1, then Demand is price inelastic, or the demand is not sensitive to price changes.

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