Price elasticity of demand definition investopedia


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Price elasticity of demand definition investopedia

  1. 1. 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
  2. 2. Sliding Scale Fees Demand ElasticityInelastic ElasticQuantity Demanded Cross Elasticity Of DemandTax Incidence Total Revenue TestPricing Power Income Elasticity Of DemandTry Our Stock Simulator!Test your trading skills!Related DefinitionsGet an MBA Oil and Gas Management Degree from UKArticles Of InterestWhat Is Elasticity?Elasticity measures the relationship between a good and its price based on consumer demand, consumer income, and its availablesupply. Learn the basics about it here.The History Of Economic ThoughtEconomics is a vital part of every day life. Discover the major players who shaped its development.
  3. 3. Economic Indicators For The Do-It-Yourself InvestorThese tools put the market in your hands.Explaining The World Through Macroeconomic AnalysisFrom unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.Understanding Supply-Side EconomicsDoes the amount of goods and services produced set the pace for economic growth? Here are the arguments.Why We Splurge When Times Are GoodThe concept of elasticity of demand is part of every purchase you make. Find out how it works.MicroeconomicsThis tutorial teaches the basics of one of the most important economic topics. A must for all investors.Economics BasicsLearn economics principles such as the relationship of supply and demand, elasticity, utility, and more!Leading Economic Indicators Predict Market TrendsLeading indicators help investors to predict and react to where the market is headed.Great Company Or Growing Industry?Look at the big picture when choosing a company - what you see may really be a stage in its industrys growth.Searching for price elasticity of demand definition?