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Price Elasticity of Demand

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Last updated date: 22nd Mar 2024
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Introduction

Price Elasticity of Demand can be defined as the degree to which the effective desire for a commodity changes as the Price of that commodity varies. Generally, it has been observed that willingness to buy a certain commodity changes as those things become more expensive. The Price change of a commodity also affects its Demand. 


We can find the Elasticity of Demand, or the responsive degree of Demand by comparing the percentage of change in Price with the quantity of the Demand of that commodity. In this article, we shall look at the concept of the Price of Elasticity of Demand. 


The Formula for Price Elasticity of Demand 

The Price Elasticity of Demand can be defined as an economic measure of the change in the quantity demanded or purchased of the product concerning its Price change. Mathematically, the Price Elasticity of the Demand formula can be explained as:


The Price Elasticity of Demand formula is = \[\frac{\text{% Change in Quantity Demanded}}{\text{% Change in Price}}\]


The cross-Price  Elasticity of Demand is also an economic concept that measures the responsiveness in quantity demanded of one good when the Price for other good changes. This measurement is calculated by taking the percentage change in the quantity demanded of a particular good divided by the percentage change in the Price of the other good.


To calculate the Price Elasticity of Demand , we divide the change in quantity by initial quantity to calculate a percentage. If there is a Price rise from 50 to 70, we divide 20/50 = 0.4 = 40%.

FAQs on Price Elasticity of Demand

1. What are the Determinants of Price Elasticity of Demand?

There are three determinants of the price elasticity of demand. They are:

  1. The Availability of Close Substitutes: If a product has many close alternatives, for example, fast food, then people tend to react strongly to a price increase of one firm’s fast food. Thus, the price elasticity of demand for this product is high.

  2. The Importance of the Product’s Cost in One’s Budget: If a product, like salt, is very inexpensive, consumers are relatively detached about a price increase. Hence, salt has a low price elasticity of demand.

  3. The Period Under Consideration: Price elasticity of demand is greater if you study the effect of a price increment over two years rather than one week.

2. Define the 5 types of Elasticity.

Price elasticity can broadly be divided into 5 types, these are:

  1. Perfectly Elastic Demand: When there is a small change in product price causes a major change in its demand.

  2. Perfectly Inelastic Demand: When there is no change produced in demand with a change in its price.

  3. Relatively Elastic Demand: When there is a proportionate change produced in demand is greater than the proportionate change in price.

  4. Relatively Elastic Demand: When the percentage change produced in demand is lower than the percentage change in the price of a product.

  5. Unitary Elastic Demand: When there is a proportionate change in demand of a product produces the same change in the price.

3. What is the price elasticity of the demand calculator?

The price elasticity of demand calculator is a mathematical tool that is available for everyone who is trying to produce the perfect price for their respective products. Using this, you will be able to decide whether you should charge more for your product or decrease the price, but increase the demand. This calculator uses the midpoint formula to calculate the elasticity of demand. Once you calculate this value, you can head straight to the ideal price calculator to deduce what price is the best for your product.

4. What is Price Inelasticity?

Price inelasticity is the situation where a change in the price of a commodity does not cause a proportional change in its demand and the change in demand I lower than the change in the price of the commodity. This phenomenon is generally seen in those commodities that are considered very essential for public life like Petrol and Diesel, Medical supplies and Power, etc. The more price inelastic a compound is, the more stability it sees in its demand. 

5. How does the responsiveness of quantity affect the price elasticity of demand?

By its very definition, the elasticity of demand is the change in demand due to the change in one or more of the variable factors that it depends on. The price change that is brought at the price of the commodity can be due to several reasons like reduction in raw materials price or discounts due to company policy. So, the price elasticity of demand is generally defined as the responsiveness of the quantity demanded to a change in price and the quantity demanded to a change in income.