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Price Elasticity of Demand and Its Implications for Business and Government

Price elasticity of demand and the factors determining the price elasticity of demand for a product or service. Also, the benefits of price elasticity of demand for business and government in an economic sense and its applicability in economic decision-making.

The price elasticity of demand is measured by the percentage increase or decrease in quantity demanded in relation to the percentage increase or decrease in price.

In other words, if the percentage increase or decrease is greater than increase or decrease in price the demand is elastic and the co-efficient of price elasticity is greater than 1. If the percentage increases or decrease in quantity demanded is equal to the percentage increase or decrease in price then the price elasticity in unitary and the price elasticity are equal to 1. On the contrary, if the percentage in crease or decrease in quantity demanded is less than the percentage increase or decrease in price then the price elasticity of demand is in elastic and the price elasticity of demand is less than 1. As the demand curve slopes down the relationship between the price and quantity demanded can be depicted by a diagram and see how the shape of the demand curve changes if the price changes for the three categories of price elasticity of demand such as elastic, unitary and inelastic.

Elastic Demand Curve

Demand Curve When the Price Elasticity of Demand is Unitary

Inelastic Demand Curve

As depicted in the above diagrams of elastic, unitary and inelastic demand curves one can see the slope of the curve is getting steeper when the price elasticity of demand is decreasing. In addition, in the elastic demand curve diagram the total revenue is increasing when the price reduces from P1 to P2 because the quantity is increasing more compared to the price reduction and there fore the total revenue increases if the demand is elastic. In the second diagram when the price elasticity is equal to 1 the total revenue do not change because the price change percentage and quantity change percentage is equal. It can be seen from the unitary price elasticity demand curve diagram when the price is reduced from P1′ to P2′ the quantity is increased by the same percentage from Q1′ to Q2′. And the total revenue does not change when the price reduced or increased. However, as depicted in the inelastic demand curve when the price is reduced from P’1 to P’2 the quantity demanded is increased by a lesser percentage than the price reduction and there fore the total revenue is reduced. There fore the consequences of price increase or reduction when the price elasticity is elastic, unitary and inelastic can be summarized as below.

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