Elasticity — FAQ

Not necessarily. While a steep demand curve looks inelastic, elasticity actually changes along a straight-line demand curve. At high prices (top of the curve), demand is elastic, while at low prices (bottom of the curve), it becomes inelastic. The gradient is constant, but the ratio of price to quantity changes. Therefore, you must calculate the PED value at a specific point or over a specific price change rather than just judging by the steepness of the entire curve.

Yes, for a standard good, PED is always negative because price and quantity demanded have an inverse relationship (as price goes up, demand goes down). However, for interpretation, we are interested in the magnitude of the response. We use the absolute value (ignoring the minus sign) to classify demand as elastic (>1) or inelastic (<1). A value of -2.5 is more elastic than -0.5. The negative sign is assumed, but the focus is on the number itself to guide pricing strategy.

No, elasticity values are not static. They are a snapshot at a particular point in time and at a particular price level. Factors that determine elasticity, such as consumer tastes, income levels, the number of competitors, and technology, are constantly changing. A successful business must periodically re-estimate the elasticity of its products to ensure its pricing and marketing strategies remain effective and responsive to current market conditions.