Price Elasticity of Demand
Elasticity puts a number on how strongly quantity answers a price change: the percentage change in quantity divided by the percentage change in price. Whether that number lands above or below one decides whether a price rise raises or lowers what the seller takes in.
What a learner can do afterwards
- Compute price elasticity of demand from two points and label it elastic, inelastic or unit elastic
- Predict what happens to total revenue when an elastic good and an inelastic good each rise in price
- Give reasons a good comes out inelastic (few substitutes, small share of a budget, habit or medical need) and apply one to a real product
1 · Read
Elasticity is a number for how strongly buyers react when price moves. Divide the percent change in quantity by the percent change in price. Concert tickets rise 10 percent and sales fall 20 percent, so elasticity is 2. Above 1 means elastic, below 1 means inelastic, and exactly 1 means unit elastic. Ignore the minus sign when you label it.
Elasticity decides whether a price rise makes a seller richer or poorer. With elastic demand, the higher price drives away so many buyers that total revenue falls. With inelastic demand, buyers mostly stay, so the higher price raises total revenue. Petrol can climb without sales collapsing, while one brand of cereal cannot. Tax collectors use the same logic, taxing inelastic goods to raise money with less fuss.
What makes a good inelastic? Few substitutes, a small share of a budget, habit, or medical need. Insulin barely moves when its price rises, and commuters keep buying petrol. At the extremes, perfectly inelastic demand is a vertical line where quantity never changes, like a life-saving drug with no rival. Perfectly elastic demand is flat: any rise wipes out sales, like one potato stall among fifty identical neighbours.
Supply gets the same treatment, measuring how fast sellers adjust. Farmers cannot grow extra wheat overnight, so short-run farm supply is inelastic, while a factory with idle machines reacts fast. Both sides use the same percent-change formula, which keeps cheap and pricey goods comparable. Knowing both tells you who really feels a price shock.
Divide the two percent changes, label the number against 1, and read revenue off the label.
2 · Watch
Take it off screen
Where it sits
Where this leads
8 questions wait behind this lesson, each with its answer explained. Every answer feeds the sky: stars light as they are learned, and dim when it is time to come back.