Elasticity

If a given change in price causes a smaller proportionate change in quantity demanded, then the demand for the good or service is said to be inelastic.

In the diagram to your left, P_o, the initial price is 65 cents per litre, and P₁, the new price, is 75 cents per litre; a 10 cent per litre increase.

The percentage change in price is 10 cents per litre / 65 cents per litre = a 15% increase.

Q_o, the initial quantity demanded is 20,000 litres; Q₁, the new quantity demanded, is 19,500 litres. The change in quantity demanded is 500 litres, on an initial demand level of 20,000 litres = a 2.5% decrease.

The price elasticity of demand for petrol is defined as the percentage change in quantity demanded divided by the percentage change in price. (Ignore any minus signs). In this example, the price elasticity of petrol is 2.5% / 15% = 0.167.

Goods with price elasticities less than 1.0 are called inelastic