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Price Elasticity of DemandThis is a measure of the responsiveness of demand to changes in price. Price elasticity of demand may be calculated using the point method as follows:
For example, assume the price of particular new car model rose from $20,000 to $25,000, resulting in demand falling from 10,000 to 5,000 new car sales. The calculation would be as follows;
If elasticity is greater than 1 (as in the above example), there is an ELASTIC demand; if elasticity equals 1 (or less) then demand is INELASTIC. ELASTIC DEMAND means that when price increases lead to a MORE THAN proportional decrease in the quantity demanded, and vice versa. The degree of elasticity depends on the availability of substitutes. Elastic demand tends to be for products often regarded as luxuries, including DVD equipment, cameras, and cars etc. INELASTIC DEMAND means that when price increases lead to a LESS THAN proportional decrease in the quantity demanded and vice versa. Inelastic demand tends to be for essential products, which cannot be done without, such as bread, milk, beer and cigarettes etc.
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