The percentage change in demand, or the percentage change in the number of units demanded, divided by the
percentage change in the price of the product tells us the Price Elasticity
of Demand.
For example, if demand for a car goes down 8 percent when a seller raises the price by 2 percent, the price elasticity
of demand is -8 / 2, which equals -4.

The Price Elasticity of Demand Coefficient
is the absolute value, or non-negative value, of the Price Elasticity of
Demand formula, and is used to determine how elastic the demand is. This coefficient can range from 0 to infinity.
For
example, if the price elasticity of demand is -4, then the coefficient will be 4, which indicates Elastic.
The left column shows the value of the coefficient, the right column shows what happens if you raise the price given
that coefficient. Basically, this coefficient tells you how much changing
the price affects the demand for the product.
You are most likely to encounter the second and fourth values in real life.
When the value of the Price Elasticity of Demand Coefficient equals 0, the demand is said to be perfectly inelastic,
which means that demand does not decrease
at all in response to price increases.
Demand is said to be elastic when a change in price causes an opposite
change in total revenue--an increase in price
will decrease total revenue, and vice versa. This is known as
elastic demand
.
Total revenue
is the number of units
sold multiplied by the price. In most situations, whether elastic or inelastic, demand goes down to some extent when
price goes up--however, in elastic demand, demand drops so quickly in relation to price raises, that total revenue goes
down.
Demand is said to be inelastic
if a change in price results in the same change in total revenue--raising the price
increases total revenue.
Inelastic demand
- increasing the price will increase total revenue, and vice versa. The more people need a certain
product, and cannot go with substitutes, the more inelastic demand will be; i.e. demand drops slowly relative to price
increases, so total revenue increases. In a
perfectly
inelastic demand
, demand does not go down at all despite price
increases.
Total revenue is calculated by multiplying the price
by the number of units sold.
For example, if it costs an
organization $5 for each unit they produce, and they sell each unit for $7, and they sell 10 units, their total revenue is
$70.
Cost
is not a factor in total revenue
.
Elastic Demand - Demand
is said to be
elastic
when a change in price causes an opposite
change in total revenue--
an increase in price will decrease total revenue, and vice versa. Total revenue is the number of units sold multiplied by
the price. So basically, when selling a product with elastic demand, if the price
goes up, demand goes down.

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