Price Elasticity Of Demand
The price elasticity of demand measures the responsiveness of quantity demanded to changes in the price of a good. It is calculated by the percentage change in quantity demanded divided by the percentage change in the price.
The price elasticity of demand is a measure of the sensitivity of demand to changes in price. It is a measure of how much the quantity demanded changes when the price changes. If the quantity demanded increases when the price increases, the demand is said to be inelastic. If the quantity demanded decreases when the price increases, the demand is said to be elastic.
The price elasticity of demand is an important concept in economics because it helps economists understand how consumers will respond to changes in the price of a good. This information can be used to help businesses make decisions about how to price their products.
Here are the key factors that affect the price elasticity of demand:
- Availability of substitutes: If there are many substitutes for a good, then demand for that good will be more elastic.
- Importance of the good: If a good is very important to consumers, then demand for that good will be less elastic.
- Proportion of income spent on the good: If a good is a large proportion of consumers’ income, then demand for that good will be more elastic.
The price elasticity of demand is a powerful tool for understanding how consumers will respond to changes in the price of a good. It is an important concept in economics that can be used to help businesses make informed decisions about how to price their products.
FAQs
What does price elasticity of demand of 2 mean?
A price elasticity of demand of 2 means that for every 1% increase in price, the quantity demanded decreases by 2%. This indicates that the demand is elastic, meaning consumers are quite responsive to price changes.
What is the difference between elastic and inelastic demand?
Elastic demand means a significant change in quantity demanded when the price changes (elasticity greater than 1). Inelastic demand means a smaller change in quantity demanded even when the price changes (elasticity less than 1).
What are some examples of elastic and inelastic goods?
Elastic goods include luxury items, electronics, and clothing, where demand changes significantly with price shifts. Inelastic goods include necessities like gasoline, basic food items, and prescription medications, where demand is less sensitive to price changes.
