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As per the law of demand, the higher is the price of goods, the less the consumers will purchase, and the most commonly used measure of consumer sensitivity to price is called price elasticity of demand where 1 % drop in the price of a product creates a 1 % increase. Hundreds of studies have been conducted where the factor is found mostly in the range of .5 and 1.5.
The items that are very important for everyday living has fewer substitutes and they have low elasticity just like staple foods, housing, gas, tomatoes and restaurant meals are required every day and cannot be substituted easily. Inelastic is used for items, where if the per cent change in the quantity required is less than a percentage change in price can happen.
There are certain goods with many substitutes and there are some that have higher elasticity. The automobile sector is somewhat elastic where one can delay the purchase of a new vehicle but the demand for a specific model is highly elastic and there are many substitutes available in multiple ranges. The price of electronics items like the smartphone is elastic where the increase in price can lower the demand.
The three main factors that influence demand are
If demand is elastic, the given percentage rise in price brings a large percentage decrease in quantity demanded and the total revenue decreases.
In the case of inelastic – the increase in price leads to an increase in total revenue. Also, it depends on where we are on the demand curve.
Mankiw adopted the method of reporting the absolute value of price elasticity.
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