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

Price elasticity of demand is a measure of how much the quantity demanded of a good or service changes in response to a change in its price. It helps businesses and policymakers to understand the effects of price changes on the purchase behavior of consumers, which can be useful when considering pricing strategy or taxation policy.

Price Elasticity of Demand can be calculated using the following formula: \[PED = \frac{%\Delta QD}{%\Delta P}\] PED: Price Elasticity of Demand %\Delta QD%: Percentage change in the Quantity Demanded %\Delta P%: Percentage change in the Price In other words, PED is the ratio of the percentage change in quantity demanded to the percentage change in price.

To calculate the percentage change in quantity demanded (%\Delta QD%) and the percentage change in price (%\Delta P%), we can use the following formulas: %\Delta QD% = \(\frac{QD_{New} - QD_{Old}}{QD_{Old}} \times 100\) %\Delta P% = \(\frac{P_{New} - P_{Old}}{P_{Old}} \times 100\) QD_Old: Initial Quantity Demanded QD_New: New Quantity Demanded P_Old: Initial Price P_New: New Price These formulas give us the percentage changes in quantity demanded and price, which we can then use to calculate the PED using the main formula mentioned earlier.

The value of the Price Elasticity of Demand (PED) can help interpret the sensitivity of the quantity demanded to price changes. Here are some possible values of PED and their interpretations: 1. PED > 1: Elastic Demand (The quantity demanded is sensitive to price changes) 2. PED = 1: Unitary Elastic Demand (The quantity demanded changes at the same proportion as the price) 3. 0 < PED < 1: Inelastic Demand (The quantity demanded is less sensitive to price changes) 4. PED = 0: Perfectly Inelastic Demand (The quantity demanded does not change at all when the price changes) 5. PED is negative: Giffen Good or Inferior Good (As the price increases, the quantity demanded also increases) By understanding the concept and calculating the Price Elasticity of Demand, businesses can make informed pricing decisions and anticipate the impact of price changes on their revenue.