Price Elasticity of Demand
Candlefocus EditorPrice elasticity is expressed in terms of price elasticity of demand coefficient (PEDC). The PEDC is calculated by dividing the percentage change in demand for a product by the percentage change in its price. Price elasticity can be broadly classified into four types: elastic, inelastic, unitary elastic, and perfectly elastic.
A product has elastic demand when a small change in its price results in a significant change in demand. Let us consider an example. A 1% decrease in the price of a product may lead to a 10% increase in the demand of the same product. If a significant increase in price leads to only a marginal decrease in demand, the product is said to be inelastic. On the other hand, products that exhibit unitary elasticity, experience an equal percentage change in demand with respect to the same change in price. Perfect elasticity of demand occurs when any change in price leads to an infinite change in demand.
A number of factors can affect the price elasticity of demand for a product. These include availability of substitutes, the proportion of income spent by the consumers on the product, the range of goods in the same category, and the awareness of the customers about the product.
The price elasticity of demand is a handy tool for businesses that helps them decide on their pricing and promotional strategies and policies. It also assists with forecasting customer demand and sales. By understanding the price elasticity of a particular product, businesses can adjust pricing and promotional policies to optimize sales and maximize profits.