price elasticity of demand
Price elasticity of demand is the measurement of how responsive a good or service is demanded based on a percentage change in price. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in the price of the good or service. There are many factors that the price elasticity of demand that are considered such as ranges, determinants and relationships with revenue. Price elasticity of demand has three ranges when determined. The first is elastic demand. Elastic demand occurs when the price elasticity demand is greater than one. It occurs when a change in price of one percent causes one percent change in quantity demanded. Another range of elasticity is unit elasticity of demand. It occurs when a change of one percent causes exactly one percent to change in quantity demanded. A third range is inelastic demand. It is the opposite of elastic demand. It occurs when a change of a price of one percent is less than one percent in the quantity demanded (Miller, 2013). There three main determinants of price elasticity of demand. One determinant is the existence, number, and quantity of substitutes. The closer the substitutes for a certain product or service exist as well as the amount, the greater the price of the elasticity demanded will be. The second determinant is the percentage of a consumer’s total budget devoted to purchase the commodity. The greater the share of a person’s budget spent of a product or service, the greater the person’s price elasticity of demand is. The third determinant is the length of time allowed for the adjustment to changes in the price of the commodity. When the price of a service or good changes and that price change is consistent, more and more people will learn the trends (Miller, 2013). Price elasticity of demand has a distinct relationship with the total revenues of a firm. If demand is price inelastic, an increase in price will lead to increase in revenue. This occurs because the