Price Elasticity of Demand (PED)

Price Elasticity of Demand (PED)

Gauging price elasticity enables producers and service providers – suppliers – in an economy to set optimal prices that engage optimal buyer demand. Price elasticity is a quantitative economic tool that plots exactly how demand will fluctuate depending on price levels. Price elasticity of demand is calculated by taking the % change in demand for a given product and dividing it by the % change in price. If demand is elastic, demand will shift depending on the degree of elasticity. If demand is inelastic, demand will be broadly impervious to price shifts (again depending on the degree of elasticity). Luxury and non-essential products or markets where there are ample acceptable substitutes exhibit elastic demand. Perfect elasticity occurs when very big changes in demand result from very small changes in price. Petrol prices or products to which consumers attach significant brand value are inelastic because price changes barely affect demand.

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