What is price elasticity of demand? How can it be measured?

Price elasticity of demand is a measure of how much the quantity demanded of a good changes in response to a change in its price. It is an important concept in economics because it helps us understand how sensitive consumers are to changes in the price of a good, which in turn helps businesses determine the potential impact of price changes on their sales and revenue.

Price elasticity of demand (E_d) can be calculated using the following formula: E_d = \frac{ \% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}} To calculate the percentage change in quantity demanded and percentage change in price, we can use the following formulas: \% \text{ Change in Quantity Demanded} = \frac{\text{New Quantity Demanded - Old Quantity Demanded}}{\text{Old Quantity Demanded}} * 100 \% \text{ Change in Price} = \frac{\text{New Price - Old Price}}{\text{Old Price}} * 100

First, find the old and new quantity demanded, as well as the old and new price for the good in question. Then, plug these values into the formulas from Step 2 to determine the percentage change in quantity demanded and percentage change in price. Finally, use these values to calculate the price elasticity of demand using the formula from Step 1.

The value of price elasticity of demand can help us understand the relationship between changes in price and changes in quantity demanded: 1. If E_d > 1, the demand is considered elastic: The percentage change in quantity demanded is greater than the percentage change in price. This means that consumers are relatively sensitive to changes in price. 2. If E_d = 1, the demand is considered unitary elastic: The percentage change in quantity demanded is equal to the percentage change in price. 3. If E_d < 1, the demand is considered inelastic: The percentage change in quantity demanded is less than the percentage change in price. This means that consumers are relatively insensitive to changes in price. Understanding the price elasticity of demand can help businesses make informed decisions about pricing strategies, as it provides insight into how consumers are likely to react to price changes.