What is price elasticity of demand?
Meaning of Price Elasticity of Demand: – The price elasticity of demand is a measure of how a product’s usage changes in response to price changes. Price elasticity of demand measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded-or supplied-divided by the percentage change in price.
The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price. In mathematic terms, it’s as follows: –
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
We say a good is price elastic when an increase in prices causes a bigger % fall in demand. e.g. if price rises 20% and demand falls 50%, the PED = -2.5.
Price elasticity is a term used by economists to describe how supply and demand for a commodity fluctuate as its price varies.
Further explanations of price elasticity of demand
Some products’ pricing are particularly inelastic, according to economists. That is, a price reduction does not significantly boost demand, and a price rise does not significantly decrease demand.
For Example: – Gasoline, for instance, has a low price elasticity of demand. Aviation Industry, the transportation industry, and practically every other buyer will continue to buy as much as they need to.
Other items are significantly more elastic, therefore price movements induce significant changes in demand or supply for these products.
Marketing experts, unsurprisingly, are very interested in this topic. It’s even possible to argue that their vision is to develop inelastic demand for the items they sell. They do it by recognizing a significant difference between their products and any others on the market.
What is elasticity?
Meaning of Elasticity: – If the quantity demanded of a product changes greatly in response to changes in its price, it is termed “elastic.” That is, the demand point for the product is stretched far from its prior point. If the quantity purchased shows a small change after a change in its price, it is termed “inelastic.” The quantity didn’t stretch much from its prior point.
Availability of substitutes is a factor
The easier it is for a shopper to switch from one product to another, the lower the price will be.
For example, in a society where everyone enjoys coffee and tea alike, if the price of coffee rises, people will easily switch to tea, and coffee demand will plummet. This is due to the fact that coffee and tea are often used interchangeably.
Urgency is a factor
The more discretionary a purchase is, the less it will respond to price increases in terms of quantity of demand. The elasticity of the product demand is higher.
Let’s say you’re thinking about getting a new washer, but your present one is still functional. It’s simply antiquated and out of date. If the cost of a new washing machine rises, you’re more inclined to put off buying one until prices fall or your present machine breaks down.
However, the less discretionary a product is, the lower the quantity demanded. Luxury things that people buy for their brand names are an example of inelastic items. Addictive goods, as well as necessary add-on goods such ink-jet printer cartridges, are very inelastic.
All of these items have one thing in common: they don’t have a good substitute. Another tablet manufacturer will not suffice if you genuinely desire an Apple iPad. Higher prices have no effect on addicts. In addition, only HP ink can be used in HP printers.
Sales Skew the Numbers
The duration of the price fluctuation is also significant.
A one-day sale has a different answer to price changes than a price adjustment that lasts for a season or a year.
Grasp the price elasticity of demand and examining it across different items requires a clear understanding of temporal sensitivity. Rather than changing their behaviours, customers might embrace a periodic price fluctuation.
Example of Price Elasticity of Demand
As a general rule, a product is said to be elastic if the amount required or purchased fluctuates more than the price changes. (For example, if the price increases by 5%, while demand decreases by -10%).
The item is also said to have unit (or unitary) price elasticity if the change in quantity bought is the same for the price change (for example, 10% /10% = 1).
Lastly, the item is said to be inelastic if the amount purchased changes less than price (for example, -5 percent demanded for a +10 percent price shift).
Consider the following scenario to determine demand elasticity: Assume that the cost of apples decreases by 6%, from $1.99 per bushel to $1.87 per bushel. As a result, grocery shoppers have increased their apple purchase by 20%. As a result, the elasticity of apple desire is 0.20/0.06 = 3.33, indicating that apple demand is extremely elastic.