lesson
Types of price elasticity
Introduction
After you have worked through this section of the learning unit, you should be able to:
- describe and differentiate between the different types of price elasticities
Now that we know how price elasticity is calculated by dividing the percentage change in quantity demanded by the percentage change in price, we need to interpret different price elasticity coefficients.
If you look at the table below, which gives you the price elasticities of demand for various goods and services, you will notice that the price elasticity ranges from 0,1 for salt to 4,68 for fresh tomatoes.
Different price elasticities
| Goods and services | Price elasticity coefficient | Goods and services | Price elasticity coefficient |
| Salt | 0,1 | Tyres | 0,9 |
| Matches | 0,1 | Shoes | 0,91 |
| Electricity (Households) | 0,13 | Private education | 0,1 |
| Coffee | 0,25 | Motor vehicles | 0,14 |
| Medical care | 0,31 | Beef | 1,27 |
| Tobacco products | 0,45 | Restaurant meals | 2,27 |
| Fuel (petrol) | 0,6 | Lamb and mutton | 2,65 |
| Beer | 0,9 | Fresh tomatoes | 4,6 |
Source: Janse van Rensburg, J., Mconnel, C.R. & Brue, S.L. 2015. Economics. McGraw Hill: London.
What is the meaning of the difference between a price elasticity of 0,1 for salt and 4,6 for fresh tomatoes? Is this difference important?
An important difference is that a price elasticity of 0,1 for salt indicates that a 1% change in the price of salt will cause a 0,1% change in the quantity demanded, while a price elasticity of 4,6 for fresh tomatoes indicates that a 1% change in price will cause a 4,6% change in the quantity demanded.
Based on this, we can say that in the case of salt, a change in the price has a smaller effect on the quantity demanded, and consumers are less responsive (sensitive) to a change in the price of salt compared to a change in the price of fresh tomatoes.
Another difference is that in the case of salt, the price elasticity is less than 1, while for fresh tomatoes, the price elasticity is greater than 1.
In fact, if you look at the table again, you will notice that goods and services can be classified as having a price elasticity of less than 1 or more than 1.
Let's look at our formula for price elasticity:
$$
e_p = {\%∆Q_d \over \%∆P}
$$
When the percentage change in price is greater than the percentage change in quantity demanded, the price elasticity will be less than 1. If the percentage change in price is smaller than the percentage change in quantity demanded, the price elasticity will be greater than 1.
As a general rule, we can state the following:
- If the percentage change in price is greater than the percentage change in quantity demanded, then the price elasticity coefficient is less than 1. This applies to things such as salt, medical services, fuel, beer and so forth. In these cases consumers are less responsive or sensitive to a change in the price.
- If the percentage change in price is smaller than the percentage change in quantity demanded, then the price elasticity coefficient is greater than 1. This applies to things such as private education, restaurant meals and fresh tomatoes. In these cases consumers are more responsive or sensitive to a change in price.
What we will identify and describe in the rest of this section are the different types of elasticity. These are based on the varying impact of a change in price on the quantity demanded, as measured by the price elasticity coefficient.
Activity
Do the following activity about the price elasticity coefficient.
You are given the following information:
| Goods and services | Price elasticity coefficient |
| Private education | 1,1 |
| Electricity (Households) | 0,13 |
| Restaurant meals | 2,27 |
| Fuel (petrol) | 0,6 |
Indicate for which goods and services is the % change in price greater than the % change in quantity demanded and for which is the % change in price smaller than the % change in quantity demanded.
Using the formula for price elasticity ep= (% ∆Qd)/(% ∆P), the % change in price is greater that the percentage change in quantity demanded for electricity (0,13) and fuel (0,6) giving it a value smaller than 1. For private education (1,1) and restaurant meals (2,27), the % change in price is smaller than the % change in quantity demanded giving it a value greater than 1.
Compare the price elasticity of electricity with restaurant meals and indicate whether consumers are more responsive (sensitive) or less responsive (sensitive) to a change in the price of electricity compared to a change in the price of restaurant meals.
If you compare the price elasticity of electricity of 0,13 with the price elasticity of restaurant meals of 2,27, we can say that consumers are more sensitive to a change in the price of restaurant meals than to a change in the price of electricity.
If the % change P is greater than the % change in Qd, then the price elasticity coefficient is...
Correct.
If the % change P is greater than the % change in Qd, the demand is relatively inelastic and the price elasticity coefficient is smaller than 1.
Think again.
If the % change P is greater than the % change in Qd, the demand is relatively inelastic and the price elasticity coefficient is smaller than 1.
A price elasticity of greater than 1 implies that the % change P is smaller than the % change in Qd.
Think again.
If the % change P is greater than the % change in Qd, the demand is relatively inelastic and the price elasticity coefficient is smaller than 1.
A price elasticity of 1 implies that the % change P is equal to the % change in Qd,