Understanding the relationship between price changes and demand in economics
Price Elasticity of Demand (PED) measures how responsive quantity demanded is to a change in price. It is a key concept in economics that helps businesses and policymakers understand consumer behavior and make informed decisions about pricing strategies.
PED = ((Q₂ - Q₁) / Q₁) ÷ ((P₂ - P₁) / P₁)
Where:
PED: -
-
Luxury goods, entertainment, restaurant meals
Necessities, addictive products
Mid-range products
Understanding PED helps businesses set optimal prices that maximize revenue and profit.
PED analysis aids in forecasting revenue changes from price adjustments.
Helps identify market opportunities and consumer sensitivity to price changes.
Guides pricing decisions in competitive markets based on consumer behavior.
More substitutes generally lead to higher elasticity.
Necessities tend to be more inelastic than luxury items.
Demand tends to be more elastic in the long run.
Items taking a larger share of budget tend to be more elastic.
