Price Elasticity of Demand

The concept of price elasticity of demand measures the responsiveness of quantity demanded to changes in price. Products can be described as having price inelastic demand if quantity demand is relatively unresponsive to changes in price, or price elastic demand if quantity demand is relatively responsive to changes in price. The availability and closeness of substitutes, the extent to which a product is addictive or a necessity, the expense of the product with respect to income, and time period are factors that determine how price elastic or price inelastic a product is likely to be. The formula for calculating price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. The coefficient will always be negative, and if it is less than negative one, demand is considered to be highly elastic. If it is greater than negative one, demand is considered to be inelastic. The message is that understanding price elasticity of demand is crucial for firms to make informed pricing decisions and to predict the impact of price changes on quantity demanded.