- Meaning of price elasticity of demand
- Price elasticity of demand’s formula
- Factors that influence the Price elasticity of demand
- Types of price elasticity of demand?
- How important is the price elasticity of demand?
Meaning of price elasticity of demand
The price elasticity of demand is an estimation that illustrates the quantity changes in demands of goods or products in response to the product’s price fluctuations in the marketplace. Or in other words, the price elasticity of demand is a measuring factor using which most economists evaluate the price elasticity, i.e., how the changes in a product’s price put affect its demand in the real market.
The price elasticity of demand helps businesses to determine the ideal price of a product or goods so that its demand in the market will get ineffective. As we see, there are certain determinants that enforce some consequences of the price elasticity of a product or good. These determinants include the substitutes or alternative solutions that consumers may opt for when the prices fluctuate. Certainly, the demand for a product remains unchanged when the necessity for a product is there in the market, making it inelastic.
Price elasticity of demand’s formula
Mathematically, the formula to calculate the Price elasticity of demand is as follows:
Price Elasticity of Demand = % Change in Demanded Quantity ÷ % Rate of Price Change
Factors that influence the Price elasticity of demand
Whenever a change in prices occurs, certain factors directly affect the price elasticity of demand for that particular product or good. To delve into how demand and supply change, read about the factors that affect the price elasticity of demand in the marketplace:
NecessityThe price elasticity of demand actively depends on the necessity of that particular product (of which the prices get updated). For example, if someone owns a petrol car, he’ll get the fuel for his daily usage, no matter how much the petrol prices fluctuate.
Availability of substitute
Another thing that may change the consumer's willingness regarding a price-changing product is the availability of the substitute in the market.
Prices of the substitute
The prices of the substitute also matter.
Duration
The next key factor is the duration in which the fluctuation in the product’s prices takes place. If it fluctuates for a long-time, then consumers will definitely incline to some other alternative present in the marketplace at better prices.
Addictiveness to the brand
The more loyalty a brand owes, the more chances that it will get unaffected by the changes in its product’s prices.
Types of price elasticity of demand
To better understand the anatomy of the Price Elasticity of Demand, plug into the below table:
| CONDITION | IT MEANS |
|
% Change in Demanded Quantity _____________________________ = ∞ % Change in Price |
Perfectly Unit Elastic or Elastic (it means changes in price result in demand declining to zero) |
|
% Change in Demanded Quantity _____________________________ = 1 % Change in Price |
Unitary (It means changes in price yield equivalent (percentage) changes in demand) |
|
% Change in Demanded Quantity _____________________________ > 1 % Change in Price |
Unit Elastic or Elastic (It means changes in price yield a significant change in demand) |
|
% Change in Demanded Quantity _____________________________ < 1 % Change in Price |
Inelastic (It means changes in price yield an insignificant change in demand) |
|
% Change in Demanded Quantity _____________________________ = 0 % Change in Price |
Ideally Inelastic (It means changes in price yield no change in demand) |
How important is the price elasticity of demand?
The calculation of price elasticity of demand helps financial analysts of a business to make reformed decisions for product prices. It is an analytic metric that let consumers inform how sensitive a particular product's pricing is. So that they can determine their future manufacturing strategies and plans.