# Price Elasticity of Demand - Explained

What is Price Elasticity of Demand?

## What is Price Elasticity of Demand?

The ratio of change in the quantity of product that is demanded or the product purchased to the change in price is called as Price Elasticity of Demand. Its formula in terms of economics is as follows PED = (dQ/Q) / (dP/P) Economists use Price Elasticity to interpret how the real economy works. They get to know about how the supply or demand changes. For example, the price of some goods does not change by changing the supply or demand of those goods. So they are termed as inelastic. Let us take an example to understand inelastic goods. People want to travel or move around the world to accomplish their tasks. For this purpose, they have to buy gasoline. If the price of oil is increased, then the people will buy the amount of gas in the same quantity. Whereas if we talk about inelastic goods, then we see very noticeable changes in the price of such goods because of the demand or supply of those goods changes. Now lets consider the formula and examine how the demand side of the equation is affected by varying the price elasticity of demand. You can see the difference in the price elasticity of supply as well.

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## Examples of Price Elasticity of Demand

It is commonly a rule of thumb that if the quantity of an item demanded or bought fluctuates more than the variations in the price, then the item or product is considered elastic. (The price is increased by +five percent, but the demand is decreased by -ten percent. On the other hand, if the quantity of an item demanded or bought is the same as the price of that item then it is considered as Unit elasticity.(ten percent/ ten percent is equal to one). If the quantity bought or demanded changes lower than its price, it is said to as inelastic (-five percent demanded a +ten percent variation in price). Lets calculate the elasticity of demand. Let the price of an apple is decreased by 6 percent from USD 1.99 a bushel to USD 1.87 a bushel. Then you see that the customers or purchasers will purchase more apples. Their purchase is increased by 20 percent. Elasticity of apples = 0.20/0.06 = 3.33 In terms of demand, it shows that the apples are elastic.

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