Illustrate the Concept of Price Elasticity of Demand

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The Answer is Supply and demand curves can predict how equilibrium will change after some demand or supply shift, but we may also want to know the likely size of the change.For that we require a measure of how quantities demanded or supplied respond to changes in price.Along any demand curve its elasticity is defined as:
ED = (Percentage change in quantity demanded)/(Percentage change in price).
In other words, elasticity is ED = (∆Q/Q)/(∆P/P).For small changes the percentages will not be very different, depending on which point you call "1" and which you call "2." Because the numerator and denominator have opposite signs, elasticity is actually negative.But because demand curves slope downward, economists usually eliminate the minus sign and treat elasticity as positive.Elasticity also allows us to determine whether a change in price raises or lowers the total amount buyers spend on the good (or sellers receive as income).We can show that in a region of the demand curve where ED > 1, a rise (fall) in price lowers (raises) total spending, and where ED < 1, a rise in price lowers it.In a region where ED = 1, spending does not change with price.We usually say that demand is elastic if ED > 1, inelastic if ED < 1, and unit elastic if ED = 1.Elasticity generally varies when moving along a demand curve, even if it is a straight line.For example, the following figure portrays the demand curve given by the equation Q = 32 - 1.5P.

Supply and demand curves can predict how equilibrium will change after some demand or supply shift, but we may also want to know the likely size of the change.For that we require a measure of how quantities demanded or supplied respond to changes in price.Along any demand curve its elasticity is defined as: ED = (Percentage change in quantity demanded)/(Percentage change in price). In other words, elasticity is ED = (∆Q/Q)/(∆P/P).For small changes the percentages will not be very different, depending on which point you call 1 and which you call 2. Because the numerator and denominator have opposite signs, elasticity is actually negative.But because demand curves slope downward, economists usually eliminate the minus sign and treat elasticity as positive.Elasticity also allows us to determine whether a change in price raises or lowers the total amount buyers spend on the good (or sellers receive as income).We can show that in a region of the demand curve where ED > 1, a rise (fall) in price lowers (raises) total spending, and where ED < 1, a rise in price lowers it.In a region where ED = 1, spending does not change with price.We usually say that demand is elastic if ED > 1, inelastic if ED < 1, and unit elastic if ED = 1.Elasticity generally varies when moving along a demand curve, even if it is a straight line.For example, the following figure portrays the demand curve given by the equation Q = 32 - 1.5P. Total spending on the good equals price times quantity, shown as the area of the rectangle under the demand curve.(Price is the height and quantity is the base.) An increase in price from $13 to $13.50 (a range where elasticity exceeds 1) reduces total spending from $162.50 to $158.63.An increase from $6.00 to $6.50 (where elasticity is less than 1) increases it from $138.00 to $144.63.The rectangle whose height is $13.50 has a smaller area than the one whose height is $13.00, but the reverse holds when comparing the rectangle whose height is $6.50 with the one whose height is $6.00.

Total spending on the good equals price times quantity, shown as the area of the rectangle under the demand curve.(Price is the height and quantity is the base.) An increase in price from $13 to $13.50 (a range where elasticity exceeds 1) reduces total spending from $162.50 to $158.63.An increase from $6.00 to $6.50 (where elasticity is less than 1) increases it from $138.00 to $144.63.The rectangle whose height is $13.50 has a smaller area than the one whose height is $13.00, but the reverse holds when comparing the rectangle whose height is $6.50 with the one whose height is $6.00.

Illustrate the Concept of Price Elasticity of Demand

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