What is the price elasticity of demand? Can you explain it in your own words?

Price elasticity of demand (PED) is an economic concept that measures the responsiveness of the quantity demanded for a good or service to a change in its price. It shows how sensitive the demand for a product is to a change in its price. This can be useful for businesses when making pricing decisions, as it can help them predict how sales would be affected by changes in prices.

Price elasticity of demand can be calculated using the following formula: \[PED = \frac{\% \text{ change in quantity demanded}}{ \% \text{ change in price}}\] To determine the percentage change in quantity demanded and percentage change in price, we can use the following formulas: \[\% \text{ change in quantity demanded} = \frac{\text{new quantity demanded} - \text{old quantity demanded}}{\text{old quantity demanded}} \times 100\] \[\% \text{ change in price} = \frac{\text{new price} - \text{old price}}{\text{old price}} \times 100\]

After calculating the price elasticity of demand, we can interpret its value: 1. If PED < -1, the demand is said to be elastic. It means that the quantity demanded is highly responsive to changes in price. A price decrease will result in a proportionately higher increase in quantity demanded, and a price increase will lead to a proportionately higher decrease in quantity demanded. 2. If PED = -1, the demand is unitary elastic. The percentage change in quantity demanded is equal to the percentage change in price. This indicates that the revenue will remain the same when the price changes. 3. If -1 < PED < 0, the demand is inelastic. The percentage change in quantity demanded is less than the percentage change in price. In this case, the change in price will not have a significant impact on the overall quantity demanded. 4. If PED = 0, the demand is perfectly inelastic. The quantity demanded does not change with changes in price. The demand for the good will remain constant regardless of the price of the product, and it might be the case for essential goods and services. Remember, the PED value is always negative because the demand curve generally slopes downward, signifying that the quantity demanded decreases as the price increases. However, we typically talk about PED in absolute terms (ignoring the negative sign) for the ease of interpretation.