# The point of this essay is to clarify and point up the different concepts of elasticity of demand passing through examples and diagrams.

The point of this essay is to clarify and point up the different concepts of elasticity of demand passing through examples and diagrams. In every market economy, when the price of a good rises the quantity demanded will fall and vise versa. Conversely, in most cases this is not enough. We would also like to know how much will the quantity demanded rise or fall. In other words, we will want to know how responsive demand is to a rise in price. This responsiveness of quantity demanded to a change in price is what we call price elasticity of demand. Therefore, what we want to compare is the size of the change in quantity demanded with the size in the change in price. Because of the different units that price and quantity are measured in, the only approach we can do this is to use percentage or proportionate changes. From this derives the “formula of the price elasticity of demand (PED)” for a product, which is the percentage (or proportionate) change in quantity demanded divided by the percentage (or proportionate) change in price. Putting this formula in symbols we have:

PED=   %ΔQD

%ΔP

Where E is the Greek E and is the symbol we use for elasticity and Δ is the capital Greek delta and is the symbol we use for a

“change in”.

As it was mentioned before, elasticity of demand is measured in proportionate or percentage terms. This happens for three different reasons. To begin with, by using these measures, we are able to compare the changes in two different things, which are measured in two different types of unit. In addition, we pass up the problem of what size units to use, because we get hold of the same result whichever price unit we use, consequently we avoid the problems of a plain difference in price change. As a final point, using these measures is the only sensible way to settle on how big a change in price or quantity is.

According to the law of demand, every price change has as a result the change of the quantity demanded on the opposite direction. This negative relationship between the price and the quantity demanded has as a result the numerous price of the elasticity of demand to be negative. However, most of the times, we ignore the negative sign and we just concentrate on the value of the figure, which shows whether the demand is elastic or inelastic.

Thus, when the value of the elasticity is greater than one, we have elastic demand. In this case, as the price rises so quantity demanded falls and vice versa. This happens because a change in price causes a proportionately larger change in the quantity demanded and therefore E > 1. Moreover, it is obvious that the change in quantity has a bigger effect on the total consumer expenditure than does the change in price. When the price rises, for instance, there will be such a large fall in consumer demand that less will be spent than before. In other words, total expenditure changes in the same direction as quantity.

P(£)

a

5                       b

4

D

...

#### Here's what a teacher thought of this essay

The essay could do with more statistics, for example including example figures from diagrams in the formulae for elasticity of demand, to support the concepts of inelastic and elastic demand. The conclusion is also very short. Furthermore, the author didn't fully explain why the concepts help producers. It should be explained further that a producer can increase the price if demand is inelastic, but then this has implications in terms of customer loyalty. Moreover, how does elasticity help consumers? It's more of a concept to say how price changes alter consumers' demand, rather than a tool they can actually use.