Video:Price Elasticity of Demand

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Transcript:Price Elasticity of Demand

Price elasticity of demand it is used to see how sensitive the demand for a good is to a price change.

The Formula for the Price Elasticity of Demand:

• % change in quantity demanded divided by % change in prices

Examples to Calculate Price Elasticity of Demand:

You may be asked the question, "Given the following data, calculate the price elasticity of demand when the price changes from $9.00 to $10.00"

We know that the original price is $9 and the new price is $10. From the data, we see that the quantity demanded when the price is $9 is 150 and when the price is $10 is 110.

To calculate the price elasticity, we need to know what the percentage change in quantity demand is and what the percentage change in price is. The formula used to calculate the percentage change in quantity demanded is:

• New Quantity Demanded minus Old Quantity Demanded divided by Old Quantity Demanded. That is 110 - 150 / 150 = -40/150 = -0.2667

We note that % Change in Quantity Demanded = -0.2667 We leave this in decimal terms. In percentage terms this would be -26.67%.

Similar to before, the formula used to calculate the percentage change in price is:

• New price minus Old Price, divided by Old Price, that is 0.1111

We have both the percentage change in quantity demand and the percentage change in price, so we can calculate the price elasticity of demand. We go back to our formula of price elasticity of demand is equal to % change in quantity demanded divided by % change in priceWe can now fill in the two percentages in this equation using the figures we calculated earlier, which equals 2.4005 We conclude that the price elasticity of demand when the price increases from $9 to $10 is 2.4005.

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