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Demand Elasticity

Candlefocus Editor
Demand elasticity is an important concept in economics that measures the responsiveness of customers to a change in price. Simply put, it is a measure of how much quantity people are willing to purchase of a product or service when the prices change. It is a key component in determining whether a business can make the most of their pricing strategy; whether they should increase or decrease prices, based on the elasticity of their customers' demand.

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. This equals the ratio of the percentage change in quantity to the percentage change in price. If price elasticity of demand is greater than 1, then it means that when the price of a good or service rises, people will buy less of it; it is said to be elastic. Conversely, when price elasticity of demand is less than 1, then it means that when the price of a good or service rises, people will buy more of it; it is said to be inelastic.

The availability of a substitute for a product is an important factor deciding its elasticity. If there are no good substitutes and the product is necessary, then people will have no option other than buying it at whatever price, making it inelastic. The elasticity of demand also differs according to income level; a luxury good, for example, would be very elastic in comparison to a cheap basic necessity. With luxury goods, people are more willing to substitute with similar but cheaper options, thus making their elasticity higher.

Demand elasticity is an essential concept to understand when runnming a business. The more elastic the demand, the greater the power the consumers to attract lower prices, higher volume, and greater variety. Businesses can use this information to adjust their pricing strategies in order to benefit both their customers and their bottom line.

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