Final answer:
To determine the own price elasticity of demand, calculate the ratio of the percentage change in quantity demanded to the percentage change in price. Values greater than 1 indicate elastic demand, while values less than 1 indicate inelastic demand. This calculation helps predict revenue changes, market equilibrium, and tax incidence.
Step-by-step explanation:
How to Calculate Price Elasticity of Demand
To determine the own price elasticity of demand, and whether the demand is elastic or inelastic, you need to calculate the ratio of the percentage change in quantity demanded to the percentage change in price. This can be represented mathematically as:
Price Elasticity of Demand (PED) = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
Here's what the different ranges of elasticity indicate:
To analyze how price elasticities impact revenue, recognize that if demand is elastic, a price decrease will potentially increase total revenue, while an inelastic demand suggests that a price increase might increase total revenue. Additionally, understanding elasticity can help predict how the long-run and short-run impacts of elasticity affect equilibrium, and influence how taxes are shared between buyers and sellers.