Definition of 'Price Elasticity Of Demand'
A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.
Investopedia explains 'Price Elasticity Of Demand'
Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes). Values between zero and one indicate that demand is inelastic (this occurs when the percent change in demand is less than the percent change in price). When price elasticity of demand equals one, demand is unit elastic (the percent change in demand is equal to the percent change in price). Finally, if the value is greater than one, demand is perfectly elastic (demand is affected to a greater degree 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 demanded for a good changes in response to a change in price can be influenced by a number of factors. Factors include the number of close substitutes (demand is more elastic if there are close substitutes) and whether the 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 pricing on product sales. Typically, businesses charge higher prices if demand for the product is price inelastic.
VARIOUS TYPES OF PRICE ELASTICITY OF DEMAND
Price Elasticity of demand can be defined as a measure of change in quantity demanded to the corresponding change in price. Below are the various types of elasticity of demand – 1. Elastic Demand – If the change in price leads to greater change than proportional change in demand then the demand for that good is price elastic. For example a 20% fall in price leads to a 30% increase in quantity demanded. 2. Inelastic Demand – If the change in price leads to less than proportional change in demand then the demand for that good is price inelastic. For example a 30% increase in price leads to a 15% fall in quantity demanded. 3. Unitary Demand – - If the change in price leads to equal change in demand then the demand for that good is unitary. For example a 10% increase in price leads to 10% decrease in demand. 4. Perfectly Elastic Demand – It refers to a situation when any change in price will see quantity demanded fall to zero. 5. Perfectly Inelastic Demand – It refers to a situation when any change in price will not affect the demand for a good that is quantity demanded will remain unchanged irrespective of change in the price of that good.
Five cases of Elasticity of Demand:
1. Perfectly elastic demand
2. Perfectly inelastic demand
3. Relatively elastic demand
4. Relatively inelastic demand
5. Unitary elastic demand
1. Perfectly elastic demand:
The demand is said to be perfectly .elastic when a very insignificant change in price leads to an infinite change in quantity demanded. A very small fall in price causes demand to rise infinitely. Likewise a very insignificant rise in price reduces the demand to zero. This case is theoretical which is never found in real life. 2. Perfectly inelastic demand:
The demand is said to be perfectly inelastic when a change...