Have you ever wondered why some products sell well even when their prices increase, while others sell less when their prices increase? This is where the concept of price elasticity of demand comes in. Understanding this concept is important for anyone interested in economics. In this article, we’ll explain what price elasticity of demand is and how to calculate it.
What is Price Elasticity of Demand?
Price elasticity of demand is a measure of how much the quantity of a product demanded changes in response to a change in its price. If the quantity demanded changes a lot when the price changes just a little, we say that demand is elastic. If the quantity demanded changes only a little when the price changes a lot, we say that demand is inelastic.
How to Calculate Price Elasticity of Demand?
To calculate price elasticity of demand, we use a simple formula:
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
Let’s look at an example. Suppose a store raises the price of a product from $10 to $12, and as a result, the quantity demanded decreases from 100 units to 90 units. Using the formula above, we can calculate the price elasticity of demand as follows:
% Change in Quantity Demanded = ((90 – 100) / 100) x 100% = -10%
% Change in Price = ((12 – 10) / 10) x 100% = 20%
Substituting these values into the formula, we get:
Price Elasticity of Demand = (-10% / 20%) = -0.5
In this case, the price elasticity of demand is negative, which means that demand is inelastic. This makes sense because a small increase in price led to a relatively large decrease in the quantity demanded.
Why is Price Elasticity of Demand Important?
Price elasticity of demand is an important concept for businesses and policymakers to understand. If demand is elastic, it means that consumers are sensitive to changes in price, and businesses may need to adjust their pricing strategies accordingly. On the other hand, if demand is inelastic, consumers are less sensitive to price changes, and businesses may have more pricing power.
In conclusion, price elasticity of demand is a key concept in economics that measures how much the quantity of a product demanded changes in response to a change in its price. By using the formula above, you can calculate the price elasticity of demand for any product. Understanding price elasticity of demand can help businesses and policymakers make better decisions about pricing and marketing strategies.
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