Price Elasticity of Demand and Supply: Formulas and Examples
Classified in Economy
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Elasticity
Elastic demand: A high responsiveness of quantity demanded or supplied to changes in price.
Elasticity: An economics concept that measures the responsiveness of one variable to changes in another variable.
Inelastic demand: A low responsiveness by consumers to price changes.
Necessities vs. Luxuries
Necessities tend to have inelastic demands, whereas luxuries have elastic demands.
Short Run Versus Long Run
Price elasticity of demand is usually lower in the short run, before consumers have much time to react, than in the long run, when they have a greater opportunity to find substitute goods. Thus, demand is more price elastic in the long run than in the short run.
Competitive Dynamics
Goods that can only be produced by one supplier generally have inelastic demand, while products that exist in a competitive marketplace have elastic demand. This is because a competitive marketplace offers more options for the buyer.
Price Elasticity of Demand Formula
PED = (% Δ Qd) / (% Δ P)
Where:
- PED = Price Elasticity of Demand
- % Δ Qd = Percentage change in quantity demanded
- % Δ P = Percentage change in price
Midpoint Formula for % Change in Quantity Demanded
% Δ Qd = ((Q2 - Q1) / Q1) × 100%
Midpoint Formula for % Change in Price
% Δ P = ((P2 - P1) / P1) × 100%
Price Elasticity of Supply Formula
ES = (% Δ Qs) / (% Δ P)
Where:
- ES = Price Elasticity of Supply
- % Δ Qs = Percentage change in quantity supplied
- % Δ P = Percentage change in price
Midpoint Formula for % Change in Quantity Supplied
% Δ Qs = (Qs2 - Qs1) / ((Qs2 + Qs1) / 2)
Midpoint Formula for % Change in Price
% Δ P = (P2 - P1) / ((P2 + P1) / 2)
Income Elasticity of Demand Formula
EY = (% Δ Qd) / (% Δ Y)
Where:
- EY = Income Elasticity of Demand
- % Δ Qd = Percentage change in quantity demanded
- % Δ Y = Percentage change in income
Calculating Percentage Changes
% Δ Qd = ((Q2 - Q1) / Q1) × 100%
Where:
- Q1 = Initial quantity demanded
- Q2 = New quantity demanded
% Δ Y = ((Y2 - Y1) / Y1) × 100%
Where:
- Y1 = Initial income
- Y2 = New income