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ANALYSIS OF PRICE ELASTICITIES
Economic goods have a downward sloping demand curve. This means that the higher the
price of the good, the less of it that is purchased. Within this broad statement, specific goods
respond very differently to price. Some goods respond very little to price change. Others
respond a lot. Economists have developed the concept of “price elasticity of demand” to
characterize these differences. Price elasticity of demand is defined for each point on the
demand curve as: The percentage change in consumption per percentage change in price. Since
elasticity is a percent divided by a percent it is a unitless number. Some examples clarify this
concept. 32
Price elasticity of demand should be negative. An elasticity of –0.2 means that a one
percent increase in price will stimulate a 0.2% decrease in consumption. An elasticity of -2.0
means that a one percent increase in price will result in a 2% decrease in consumption.
Mathematically, the formula for price elasticity of demand is:
∆ Q ÷ Q(
p)
∆p
÷ p
where Q(p) is the quantity consumed at price p.
Elasticity typically will vary over the range of the demand curve. Another way to look at
elasticity is to do some algebra and re-write the equation as:
∆Q
÷ ∆p
Q(
p)
÷ p
This is interpreted as the slope of the demand curve at point p divided by average
consumption at p. (i.e. quantity consumed divided by costs.) On a straight-line, the slope
remains constant over the range of the demand curve, but the average changes. Interestingly, it
32 Economists also talk about income elasticity of demand, and even price elasticity of supply. Elasticity is a widely
used concept. Therefore it is helpful to clarify specifically or by context what elasticity concept is being discussed.
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