2/4/12

Examples of price elasticity of demand


This post goes over some economic examples of the principle of price elasticity of demand.  There are three different types of elasticities for the price elasticity of demand measure.  These include elastic, inelastic, and unit elastic.

In order for a good to be elastic, the price elasticity of demand measure has to be less than -1.  Sometimes textbooks and teachers will take the absolute value of the elasticity measure.  The absolute value of a number is the distance that number is from zero.  Another way to think of the absolute value measure it to take away the negative sign if there is one.  So in the absolute value case, the price elasticity of demand measure will be greater than 1.
We can go through an example, if the price elasticity of demand measure for street signs is -1.5, then the price elasticity of demand is elastic.  Remember that the equation for the price elasticity of demand is:

Price elasticity of demand = percent change in quantity/percent change in price

So in order to get -1.5, it is necessary for the percent change in quantity to be greater than the percent change in price.  Also, remember that the price elasticity of demand measure should always be negative, because if the price goes up, the quantity demanded should go down (law of demand).

For the good to have an inelastic price elasticity of demand, the value has to be greater than -1.  Looking at it from the absolute value point of view, it must be less than 1.  The trick here is that an inelastic measure is a decimal, such as 0.84 or -0.84.

An example here could be the price elasticity of demand measure for no trespassing signs of -.34, which is inelastic.  In order for a good to have an inelastic price elasticity of demand, it is necessary for the percent change in quantity to be smaller than the percent change in price.

Finally a the price elasticity of demand measure can be unit elastic.  This means that the percent change in quantity and the percent change in price experience a 1 to 1 trade off, so if price increases by 5%, quantity will decrease by 5%.

An example of a unit elastic price elasticity of demand measure can be found for road signs as long as the elasticity is -1.  This means that the percent change in price is equal to the percent change in quantity, so the good has neither an elastic or inelastic price elasticity of demand.
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