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Interpreting values of price elasticity coefficients


Elasticities are usually interpreted as follows:

A decrease in price normally results in an increase in the quantity demanded by consumers because of the law of demand, and conversely, quantity demanded decreases when price rises. As summarized in the table above, the PED for a good or service is referred to by different descriptive terms, depending on whether the elasticity coefficient is greater than, equal to, or less than -1. That is, the demand for a good is called:
 * relatively inelastic when the percentage change in quantity demanded is less than the percentage change in price (so that Ed > - 1);
 * unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand when the percentage change in quantity demanded is equal to the percentage change in price (so that Ed = - 1); and
 * relatively elastic when the percentage change in quantity demanded is greater than the percentage change in price (so that Ed < - 1).

As the two accompanying diagrams show, perfectly elastic demand is represented graphically as a horizontal line, and perfectly inelastic demand as a vertical line. These are the only cases in which both the PED and the slope of the demand curve (∆P/∆Q) are constant, as well as the only cases in which the PED is determined solely by the slope of the demand curve (or more precisely, by the inverse of the slope of the demand curve).

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