The price elasticity of demand is used to measure the responsiveness of the demand after a change in price of the particular

product. It is calculated by dividing the percentage change in demand over the percentage change in price. There are three components to this, which are price elastic, unit elastic, and price inelastic. Price elastic shows a sensitive change of demand towards a price change, and price inelastic shows the opposite phenomena; the price change is not so sensitive towards the goods demanded. For price elastic, it is usually luxury goods such as cars and houses. These goods are very elastic, as a small change in the price may cause a huge shift in demand. For example, assuming that a car is worth RM80, 000 and there is a slight increase in price from the original price to RM95, 000. To calculate this: (95000-80000) / 80000 = 0.1875 After this, we would now look at the demand. Assuming at RM80, 000 the quantity demanded were 15 cars, and after the hike of price, the quantity has dropped to 5 cars. We would calculate this: (5-15) / 15 = - 0.67 To calculate the price elasticity of demand: (-0.67) / 0.1875 = 3.57 If this value is more than 1, hence it is a very sensitive product to price changes. The value we calculated was 3.57, a very high product of elasticity of demand. This shows that cars are extremely sensitive to a slight change in price. A lower elasticity of demand would usually be in the case of household goods such as groceries. For example, assuming that the price of sugar is RM5 for 1 packet and the price goes up to RM8. The quantity demanded for sugar at the old price was 20 packets, and with the new price, it drops to 19 packets. To calculate this: (RM8 RM5) / RM5 = 0.6 The quantity demanded: (19 20) / 20 = - 0.05 When calculating the price elasticity of demand:

(- 0.05) / 0.6 = 0.08 This figure shows that it is lesser than 1, hence this product has a low price elasticity. Usually these goods, even if there is a high change in price, people still resort to it, as it is a basic good used to satisfy ones needs food.