Price elasticity of demand and supply, their calculation, determinants, and the link to total revenue.
Price elasticity of demand (PED)
PED measures how responsive quantity demanded is to a change in price.
PED is usually negative (price and quantity move in opposite directions); we focus on the size:
| Value | Term | Meaning |
|---|---|---|
| PED > 1 | elastic | quantity very responsive |
| PED < 1 | inelastic | quantity barely responds |
| PED = 1 | unit elastic | proportional change |
| PED = 0 | perfectly inelastic | no response |
| PED = ∞ | perfectly elastic | infinite response |
Determinants of PED: number of substitutes (more → more elastic), whether the good is a necessity or luxury, proportion of income spent, time (more elastic over time), and habit/addiction.
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