The Coefficient of Price Elasticity of Demand

The coefficient of price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Formula for Coefficient of Price Elasticity of Demand

The formula for the coefficient of price elasticity of demand is as follows:

% change in quantity demanded / % change in price

Interpretation of Coefficient of Price Elasticity of Demand

The coefficient of price elasticity of demand can take on different values, depending on the steepness of the demand curve.

- If the coefficient is less than 1 (in absolute value), then demand is said to be inelastic. This means that a change in price leads to a relatively small change in quantity demanded.
- If the coefficient is greater than 1 (in absolute value), then demand is said to be elastic. This means that a change in price leads to a relatively large change in quantity demanded.
- If the coefficient is exactly 1, then demand is said to be unit elastic. This means that a change in price leads to an equal percentage change in quantity demanded.

Factors Affecting Coefficient of Price Elasticity of Demand

The coefficient of price elasticity of demand can vary depending on a number of factors, such as:

- Availability of substitutes: if there are many substitutes for a good or service, then demand is likely to be more elastic, as consumers can easily switch to other options if the price of the original good or service increases.
- Necessity of the good or service: if a good or service is a necessity (e.g. food, medicine), then demand is likely to be less elastic, as consumers will continue to purchase it even if the price increases.
- Time horizon: in the short run, demand is likely to be less elastic, as consumers may not have time to adjust their behavior in response to a price change. In the long run, however, demand is likely to be more elastic, as consumers can adjust their consumption patterns or find substitutes.

Conclusion

The coefficient of price elasticity of demand is an important concept for understanding how consumers respond to changes in price. By calculating this coefficient, businesses can better understand the likely impact of price changes on their sales and revenue.

Q2-Q1/Q2+Q1 × P1+P2/P1-P2