In: Economics
Price elasticity of demand is the ratio of percentage change in QD to percentage change in its price.
If the result is more than 1, the good is price elastic.
If the result is less than 1, the good is price inelastic.
Elastic good: Smartphone
This is a normal good, since demand of the product increases if income rises or price fall. A slight change in price creates huge impact on demand, making its demand elastic – such as 2% fall in price increases 3% demand; therefore, price elasticity of demand (3%/-2% =) -1.5 (elastic by ignoring the negative sign).
Inelastic good: Cigarette
The use of this good depends on consumer’s habit and usually habit cannot be changed although there is price rise. Therefore, it becomes inelastic – a change in price cannot impact much on its quantity demanded. Suppose a 2% price rise decreases only 1% of demand; therefore, price elasticity of demand (-1%/2% =) -0.5 (inelastic by ignoring the negative sign).