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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