How strongly quantity responds to price, and why it decides who bears taxes and how revenue moves.
Warming up the engine…
The responsiveness of quantity demanded to price, measured in percentages so it is unit-free: elastic demand stretches a lot for a small price change, inelastic demand barely moves.
PED = %ΔQd / %ΔP ; |PED| > 1 elastic, < 1 inelastic
Elasticity decides who can raise prices and what happens to revenue: cutting price raises revenue only when demand is elastic. Necessities with no substitutes (petrol, insulin) are inelastic; luxuries with many substitutes are elastic. On a straight-line demand curve elasticity is not constant, it falls as you slide down.
Revenue test: price and revenue move in OPPOSITE directions when demand is elastic, the SAME direction when inelastic. Quote elasticity as a percentage ratio, not a slope.
Now prove you have it
Move the curve to where you think it lands, and get told exactly which part you got right.
Real-world scenarios on this model
Equilibrium at Q 50, P 40.
Equilibrium: Q* = 50.0, P* = 40.0
Current equations
ElasticityelasticityHow strongly one variable responds to another, usually quantity's percentage response to a price change. is the slope question: when price moves, how hard does quantity respond? Flatten the demand curve and buyers become deal-hunters; steepen it and they pay whatever it takes. Watch the shaded surpluses change as you rotate the curves.