ECO 1304 Chapter Notes - Chapter 5: Demand Curve, Tax Incidence, Normal Good
Document Summary
The price elasticity of demand measures how responsive quantity demanded is to a price change. Price elasticity of demand (ed) = percentage change in quantity demanded / percentage change in price. Since there is an inverse relationship between price and quantity demanded, price elasticity of demand is always negative. A demand curve is: elastic (ed > 1): if % change in qd > % change in p. Inelastic (ed < 1): if % change in qd < % change in p: unit elastic (ed= 1): if % change in qd = % change in p. In an elastic demand curve, a small percentage change in price leads to a larger percentage change in quantity demanded. In a perfectly elastic demand curve (horizontal line), a small increase in price causes the quantity demanded to fall to: a small percentage change in price will change quantity demanded by an infinite amount.