Price elasticity of demand (PED) is a key idea in economics that quantifies how responsively a product’s quantity requested responds to changes in price. To put it another way, it enables us to comprehend how much the demand for a good will alter as its price varies.
Using the following formula, PED can be determined:
PED = Percentage change in quantity demanded / Percentage change in price
Why is Price Elasticity of Demand Important?
Businesses and governments must understand price elasticity of demand in order to make wise choices regarding pricing strategies and regulations that impact consumers and producers. For instance, if a product’s PED is elastic, a modest price rise may result in a substantial decline in demand. Therefore, companies should exercise caution when increasing prices in these situations.
On the other hand, if a product’s PED is rigid, a change in price might not significantly affect demand. Businesses may have more discretion in setting prices in this situation.
In conclusion, price elasticity of demand gauges how responsively demand is to changes in price. It is a key topic in economics. Making informed decisions about pricing strategies and policies can assist firms and governments. Businesses can make sure they establish prices that are both lucrative and sustainable by knowing the price elasticity of demand.