Price elasticity of demand
Also called: elasticity, elastic, inelastic
Price elasticity of demand measures how much the quantity people buy changes when the price changes. Demand is elastic if quantity changes by a bigger percentage than price, and inelastic if it changes by less.
Goods with close substitutes, like one brand of cereal, tend to be elastic. Necessities with none, like insulin or petrol in the short run, tend to be inelastic.
Elasticity decides whether a price rise raises or lowers a seller's revenue: revenue rises if demand is inelastic.
Formula
Elasticity = % change in quantity demanded ÷ % change in price
Example
If a 10% price rise cuts sales by 20%, elasticity is −2: elastic.
Related terms
- Supply and demand: Supply and demand is the model that explains prices: when more people want something than is available, its price rises; when more is available than people want, its price falls.
- Marginal utility: Marginal utility is the extra satisfaction from one more unit of something.
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