Price elasticity of demand


Elasticity is concerned with the extent to which one variable (demand), responds to a change in another variable (price). 
Definition and Equation of Price Elasticity of Demand
Price elasticity of demand refers to the responsiveness of quantity demanded to a change in price.  When a small change in price leading to a large change in quantity demanded it is price elastic demand.
When quantity demanded is unresponsive to price changes it is price inelastic demand.  
It is extremely important to suppliers as the pricing decisions which have a significant effect on their revenue. 
The calculation of elasticity may help to know the likely effect of an “other than price factor” [bad weather, war etc.] on the price of the goods and revenue of producers or the likely effect on revenue by way of increase in demand due to a lowered price from the consumers.  
The price elasticity of demand is influenced by various factors.  Those factors are as given below.
1. The proportion of income spent on the good. If only a negligible percentage of income is spent on a good those goods are tend to be price inelastic.
2. The nature of good itself is habit forming or high necessity, then it will have price inelastic demand.
3. Availability of substitutes. If the commodity has a lot of choices or substitutes, then it is tend to be highly Price elastic. 
4. Time spent on searching activity.  If more time available to search and find the commodity at cheaper price those are tend to be  price elastic.
5. The commodities with high Brand loyalty are price inelastic in nature. 

The price elasticity of demand may be calculated using the following formula:
Price Elasticity of Demand   = % Change in Quantity demanded / % Change in price
The percentage change in quantity demand and the price may be obtained using the following formula. 
 Percentage change in quantity demanded   
                           = (Change in quantity demanded/ original price) x 100
  Percentage change in price                       
                             = (Change in price/ Original price) x 100
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