True or false: price elasticity of demand deals with the extent to which cost increases as demand increases?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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This statement is false.  Price elasticity of demand does not deal with the way in which cost increases and demand increases relate to one another.  Instead, price elasticity of demand deals with the relationship between the price of a good or service and the quantity of that product that is demanded.  In other words, it has to do with how much the quantity demanded changes when the price changes.

From the law of demand, we know that (all other things being equal) the quantity of a product that people demand is inversely related to the price of the product.  When the price goes up, the quantity demanded goes down.  When the price goes down, the quantity demanded goes up.

The question, though, is how much the quantity demanded changes when the price changes.  This is very important for businesses because they need to know if they will make more money or less money by changing the price.  Price elasticity of demand is a measure of this.  It tells us how much the quantity demanded changes when the price of the product changes.

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