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2.2 PRICE ELASTICITY OF DEMAND 43

advances made it possible for computer manufactur- market. The combined effect of technological advances
ers to produce computers of given capability much and new entry pushed the supply curve for computers
more cheaply. As we will see later in this book, when rightward by an amount that equaled or exceeded the
a firm’s costs fall in this way, the supply curve shifts rightward shift in demand. The result is the long-term
rightward. Finally, the supply curve also shifted right- path for prices and quantities represented by the
ward because many new computer firms entered the dashed line in Figure 2.14.

The price elasticity of demand measures the sensitivity of the quantity demanded to 2.2

price. The price elasticity of demand (denoted by , ) is the percentage change in quan- PRICE
Q P
tity demanded (Q) brought about by a 1 percent change in price (P), which means that
ELASTICITY
percentage change in quantity OF DEMAND
Q,P
percentage change in price

If Q is the change in quantity and P is the change in price, then price elasticity of
demand A measure of
¢Q the rate of percentage
percentage change in price 100% change of quantity de-
Q manded with respect to
price, holding all other
and determinants of demand
constant.
¢P
percentage change in quantity 100%
P
Thus, the price elasticity of demand is

¢Q
Q 100%
Q,P ¢P
P 100%
or

¢Q P
Q,P (2.3)
¢P Q

For example, suppose that when the price of a good is $10 (P 10), the quantity
demanded is 50 units (Q 50), and that when the price increases to $12 ( P 2), the
quantity demanded decreases to 45 units ( Q 5). If we plug these numbers into
equation (2.3), we find that in this case the price elasticity of demand is

¢Q P 5 10
0.5
Q,P
¢P Q 2 50
As illustrated by this example, the value of , must always be negative, reflecting the
Q P
fact that demand curves slope downward because of the inverse relationship of price
and quantity: When price increases, quantity decreases, and vice versa. The following
table shows how economists classify the possible range of values for Q,P .