Define price elasticity of demand and suggest why different goods have different price elasticities.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Price elasticity of demand is the extent to which the quantity that is demanded of a product fluctuates with changes in the price of that product.  Graphically speaking, it is represented by the slope of the demand curve.  A product’s demand is said to be more price elastic if a change in price results in a large change in quantity demanded.  A product’s demand is less price elastic (more inelastic) if a change in price results in a small change in quantity demanded.

In general, when prices rise, quantity demanded falls.  But this does not happen at the same rate for all products.  For some products, a change in price does not result in much of a change in quantity demanded.  Let us examine a few reasons why this would be.

  • Lack of substitutes.  If there are no substitutes for a good, you are more likely to keep buying it if the price rises.
  • Inability to delay purchase.  If the good is something that you have to have (medicine, for example) you will be more likely to buy it even if the price rises.
  • The good is cheap compared to your budget.  If something costs only a very small amount, you will be less likely to care if the price goes up. 

These are the major causes of differences in price elasticity of demand.