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Register & LoginUnderstanding Price Elasticity of Demand
Price elasticity of demand is a metric that shows how changes in a product’s price affect its demand. Economists use it to evaluate how much a product’s demand fluctuates with its price.
Businesses use this measure to determine the optimal price of a product to maintain its demand. Factors like product necessity and availability of substitutes affect the price elasticity of a product. If a product is essential, its demand remains unchanged despite price fluctuations.
Calculating Price Elasticity of Demand
The formula to calculate the Price elasticity of demand is as follows:
Price Elasticity of Demand = % Change in Quantity Demanded ÷ % Change in Price
Factors Affecting Price Elasticity of Demand
There are several factors that influence the price elasticity of demand for a product or good. These include:
Necessity of the product, availability and prices of substitutes, duration of price fluctuations, and brand loyalty.
Types of Price Elasticity of Demand
Below is a table that provides a better understanding of the different types of Price Elasticity of Demand:
| CONDITION | MEANING |
| % Change in Quantity Demanded / % Change in Price = ∞ | Perfectly Elastic (changes in price result in demand declining to zero) |
| % Change in Quantity Demanded / % Change in Price = 1 | Unitary (changes in price yield equivalent changes in demand) |
| % Change in Quantity Demanded / % Change in Price > 1 | Elastic (changes in price yield a significant change in demand) |
| % Change in Quantity Demanded / % Change in Price < 1 | Inelastic (changes in price yield an insignificant change in demand) |
| % Change in Quantity Demanded / % Change in Price = 0 | Ideally Inelastic (changes in price yield no change in demand) |
Significance of Price Elasticity of Demand
Price elasticity of demand helps businesses make informed decisions about product pricing. It is a useful tool for consumers to understand how sensitive a product's pricing is, enabling them to plan their future manufacturing strategies.