Economics, 3rd Edition

Price elasticity of demand

=

20%

10%

= 2

In this example, the price elasticity is 2, reflecting that the change in the quantity demanded is proportion-

ately twice as large as the change in the price.

Elasticity can have a value which lies between 0 and infinity. Between 0 and 1, elasticity is said to 

be inelastic, that is the percentage change in quantity demanded is less than the percentage change in 

price. If elasticity is greater than 1 it said to be elastic – the percentage change in quantity demanded 

is greater than the percentage change in price. If the percentage change in quantity demanded is the 

same as the percentage change in price then the elasticity is equal to 1 and is called unit or unitary 

elasticity.

We have and will use the term ‘relatively’ elastic or inelastic throughout our analysis. The use of this 

term is important. We can look at a goods, for example, both of which are classed as ‘inelastic’ but where 

one is more inelastic than the other. If we are comparing good 

x, which has a price elasticity of 0.2, and 

good 

y, which has an elasticity of 0.5, then both are price inelastic but good y is more price elastic by 

comparison. As with so much of economics, careful use of terminology is important in conveying a clear 

understanding.

The calculation method described above is relatively simple. You will probably find that the institution 

you are studying in covers a more detailed method of calculating elasticity. In this next section we will 

describe two such methods, the midpoint or arc elasticity of demand and point elasticity of demand. 

Some institutions may focus on only one of these methods in which case you can (if you wish) skip the 

method below which your institution does not cover.