1. Price Elasticity Of Demand
Definition of 'Price Elasticity Of Demand'
A measure of the relationship between a change in the quantity demanded of a particular good and a
change in its price. Price elasticity of demand is a term in economics often used when discussing price
sensitivity. The formula for calculating price elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
If a small change in price is accompanied by a large change in quantity demanded, the product is said to be
elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is
accompanied by a small amount of change in quantity demanded.
Investopedia explains 'Price Elasticity Of Demand'
Price elasticity of demand measures the responsiveness of demand to changes in price for a particular
good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not
change when price changes). Values between zero and one indicate that demand is inelastic (this occurs
when the percent change in demand is less than the percent change in price). When price elasticity of
demand equals one, demand is unit elastic (the percent change in demand is equal to the percent change in
price). Finally, if the value is greater than one, demand is perfectly elastic (demand is affected to a greater
degree by changes in price).
For example, if the quantity demanded for a good increases 15% in response to a 10% increase in price,
the price elasticity of demand would be 15% / 10% = 1.5. The degree to which the quantity demanded
for a good changes in response to a change in price can be influenced by a number of factors. Factors
include the number of close substitutes (demand is more elastic if there are close substitutes) and whether
the good is a necessity or luxury (necessities tend to have inelastic demand while luxuries are more elastic).
Businesses evaluate price elasticity of demand for various products to help predict the impact of a pricing
on product sales. Typically, businesses charge higher prices if demand for the product is price inelastic.
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