What does price elasticity of demand indicate?

Nov 14, 2015

It indicates the percentage change in demand due to 1% change in price.

Explanation:

We know, price level determines the output demanded in general. Here, price level is the independent variable that controls over the output demand - the dependent variable. Based on this relationship, when we draw the demand curve (price level on the vertical axis and output demanded on the horizontal axis), we can exhibit that when the price level rises (or falls), the quantity of output demanded increases (or decreases). The price elasticity of demand simply shows that to what extent the demand will change (increase or decrease, generally in percentage) for a 1% change in the price level. A small change in price may have a large effect on demand if the demand curve is relatively flatter. A large change in price may have smaller effect in demand when the demand curve is relatively steeper. In the former case, we say demand is highly elastic to price, and in the latter case we say demand is less elastic to price. When the demand curve is strictly vertical, change in price level won't effect the demand at all, and we say that demand is inelastic to price in this case. Therefore, we can say that price elasticity of demand determines the slope of the demand curve. Remember, price elasticity of demand is always measured by PERCENTAGE CHANGE in demand due to ONE PERCENT CHANGE in price.

Hope I have cleared out the point to you :)