Price elasticity of demand definition investopedia
Published on: Mar 4, 2016
Transcripts - Price elasticity of demand definition investopedia
Price Elasticity Of DemandDefinition of Price Elasticity Of DemandA measure of the relationship between a change in the quantity demanded of a particular good and achange in its price. Price elasticity of demand is a term in economics often used when discussing pricesensitivity. The formula for calculating price elasticity of demand is:Price Elasticity of Demand = % Change in Quantity Demanded / % Change in PriceIf a small change in price is accompanied by a large change in quantity demanded, the product is said to beelastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price isaccompanied by a small amount of change in quantity demanded.Investopedia explains Price Elasticity Of DemandPrice elasticity of demand measures the responsiveness of demand to changes in price for a particulargood. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does notchange when price changes). Values between zero and one indicate that demand is inelastic (this occurswhen the percent change in demand is less than the percent change in price). When price elasticity ofdemand equals one, demand is unit elastic (the percent change in demand is equal to the percent change inprice). Finally, if the value is greater than one, demand is perfectly elastic (demand is affected to a greaterdegree by changes in price).For example, if the quantity demanded for a good increases 15% in response to a 10% increase in price,the price elasticity of demand would be 15% / 10% = 1.5. The degree to which the quantity demandedfor a good changes in response to a change in price can be influenced by a number of factors. Factorsinclude the number of close substitutes (demand is more elastic if there are close substitutes) and whetherthe good is a necessity or luxury (necessities tend to have inelastic demand while luxuries are more elastic).Businesses evaluate price elasticity of demand for various products to help predict the impact of a pricingon product sales. Typically, businesses charge higher prices if demand for the product is price inelastic.Related Video for Price Elasticity Of Demand
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