Define price elasticity of demand?

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Price elasticity of demand means the degree of responsiveness if demand for a commodity with reference to change in the price if such commodity.

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Percentage change in demand of a commodity upon percentage change in price of good

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Price elasticity of demand. ... Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes.

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Price Elasticity of Demand:
Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It helps determine how much the quantity demanded of a good or service will change in response to a change in price. The formula for price elasticity of demand is:
$$ \text{Price Elasticity of Demand} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}} $$

Types of Price Elasticity of Demand:
1. Elastic Demand: When the percentage change in quantity demanded is greater than the percentage change in price, the demand is considered elastic. This means consumers are highly responsive to price changes.
2. Inelastic Demand: When the percentage change in quantity demanded is less than the percentage change in price, the demand is considered inelastic. This means consumers are less responsive to price changes.
3. Unitary Elasticity: When the percentage change in quantity demanded is equal to the percentage change in price, the demand is considered unitary elastic.

Factors Affecting Price Elasticity of Demand:
1. Substitutability: The availability of substitutes affects price elasticity. If there are close substitutes available, demand tends to be more elastic.
2. Necessity vs. Luxury: Necessities tend to have inelastic demand as consumers will buy them regardless of price, while luxury goods have more elastic demand.
3. Time Horizon: Demand tends to be more elastic over the long term as consumers have more time to adjust their consumption patterns.

Importance of Price Elasticity of Demand:
Understanding price elasticity of demand is crucial for businesses to set optimal prices, forecast sales accurately, and make informed decisions about production and marketing strategies. It also helps policymakers to assess the impact of taxes or subsidies on consumer behavior and market efficiency.

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