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🛒principles of microeconomics review

Price-Elasticity Ratio

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

The price-elasticity ratio is a measure that quantifies the responsiveness of the quantity demanded or supplied of a good or service to changes in its price. It is a crucial concept in the study of microeconomics, particularly in the analysis of 5.1 Price Elasticity of Demand and Price Elasticity of Supply.

5 Must Know Facts For Your Next Test

  1. The price-elasticity ratio can take on values ranging from 0 to infinity, with different values indicating different degrees of responsiveness to price changes.
  2. A price-elasticity ratio greater than 1 indicates that the quantity demanded or supplied is elastic, meaning it is highly responsive to price changes.
  3. A price-elasticity ratio less than 1 indicates that the quantity demanded or supplied is inelastic, meaning it is less responsive to price changes.
  4. The price-elasticity ratio is a crucial factor in determining the impact of price changes on total revenue or total expenditure for a good or service.
  5. The price-elasticity ratio is influenced by factors such as the availability of substitutes, the proportion of a consumer's budget allocated to the good, and the time horizon being considered.

Review Questions

  • Explain how the price-elasticity ratio is calculated and what it represents.
    • The price-elasticity ratio is calculated as the percentage change in quantity demanded or supplied divided by the percentage change in price. This ratio represents the responsiveness of the quantity to a change in price, with a value greater than 1 indicating elastic demand or supply, and a value less than 1 indicating inelastic demand or supply. The price-elasticity ratio is a crucial metric in understanding the impact of price changes on the market for a good or service.
  • Describe the factors that influence the price-elasticity ratio and how they affect the responsiveness of quantity to price changes.
    • The price-elasticity ratio is influenced by several factors, including the availability of substitutes, the proportion of a consumer's budget allocated to the good, and the time horizon being considered. Goods with close substitutes tend to have more elastic demand, as consumers can easily switch to alternative options in response to price changes. Goods that make up a larger proportion of a consumer's budget are also more price-elastic, as changes in price have a more significant impact on their purchasing power. Additionally, the price-elasticity ratio tends to be more elastic in the long run compared to the short run, as consumers have more time to adjust their consumption patterns.
  • Analyze the relationship between the price-elasticity ratio and the impact of price changes on total revenue or total expenditure, and explain how this relationship can be used to inform pricing strategies.
    • The price-elasticity ratio is directly related to the impact of price changes on total revenue or total expenditure. When the price-elasticity ratio is greater than 1 (elastic demand or supply), a decrease in price will lead to an increase in total revenue or total expenditure, as the percentage increase in quantity demanded or supplied will be greater than the percentage decrease in price. Conversely, when the price-elasticity ratio is less than 1 (inelastic demand or supply), a decrease in price will lead to a decrease in total revenue or total expenditure, as the percentage increase in quantity demanded or supplied will be smaller than the percentage decrease in price. This relationship can be used by businesses to inform their pricing strategies, as they can adjust prices to maximize revenue or expenditure based on the price-elasticity of their products or services.