# Price Elasticity Of Demand

## Understanding 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.