Economics Notes: Price Elasticity of Demand, Formula and Examples

Elasticity of Demand Formula

The Elasticity of Demand Formula in Economics is an important concept for students preparing for various competitive examinations. The Elasticity of Demand can be defined as the degree to which the effective demand for a commodity changes with a change in the price of that commodity. Generally, it has been observed that demand for certain commodities changes with variations in their prices. We can find the Elasticity of Demand, or the responsive degree of Demand by comparing the percentage of change in Price with the quantity of the Demand of that commodity. Perfectly Elastic demand is the one where a small change in price results in zero demand for the product. On the other hand, Perfectly Inelastic means that there is no change in quantity even with drastic price changes.

Elasticity of Demand Formula Examples

Let’s understand the price elasticity of demand through some real-life examples.

Example 1: Take the example of Crude Oil. When the price of Crude Oil decreases in the international market, countries like India try to buy as much as possible and store it for future use when the price will increase. This behaviour demonstrates elastic demand.

Example 2: Let’s now consider a necessary commodity such as food grains and fresh vegetables.

Even with inflation and rising food prices, people will still buy these products because it is a necessity. Thus, this situation shows that demand for food is relatively inelastic.

Overall, luxuries have a highly elastic demand whereas, common necessities like food, medical equipment, etc. have a highly inelastic demand.

The Price of Elasticity of Demand Formula

The Price Elasticity of Demand can be defined as an economic measure of the change in the demand or purchase of a product with respect to changes in its price.

The Elasticity of the Demand Formula can be expressed as:

Percentage change in quantity demanded/ Percentage change in price.

Interpreting the results of Price Elasticity of Demand Formula:

• Price Elasticity of Demand greater than 1 signifies highly elastic demand i.e. consumers are highly responsive to price changes.
• Price Elasticity of Demand less than 1 signifies highly inelastic demand where consumers are less sensitive to price changes.
• When the Price Elasticity of Demand is equal to 1, it is considered an ideal situation.