Price Elasticity of Demand
- The proportionate (percentage) change in quantity demanded of a product due to proportionate (percentage) change in its price is measured by the price elasticity of demand.
- The coefficient of price elasticity shows different degrees of price elasticity like elastic, inelastic and unitary demand.
- The formula for price elasticity of demand is:

Price Elasticity of Demand:
Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It shows how sensitive the demand for a product is to a change in its price. The formula to calculate price elasticity of demand is:

Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)

- If the price elasticity of demand is greater than 1, it is considered elastic. This means that a small change in price will result in a proportionally larger change in quantity demanded.
- If the price elasticity of demand is less than 1, it is considered inelastic. This means that a change in price will have a smaller impact on quantity demanded.
- If the price elasticity of demand is equal to 1, it is considered unitary elastic. This means that a change in price will result in an equal percentage change in quantity demanded.

Cross Elasticity of Demand:
Cross elasticity of demand measures the responsiveness of quantity demanded of one product to a change in the price of another related product. It shows how the demand for one product is affected by the price change of another product. The formula to calculate cross elasticity of demand is:

Cross Elasticity of Demand = (% Change in Quantity Demanded of Product A) / (% Change in Price of Product B)

- If the cross elasticity of demand is positive, it indicates that the two products are substitutes. An increase in the price of one product leads to an increase in the demand for the other product.
- If the cross elasticity of demand is negative, it indicates that the two products are complements. An increase in the price of one product leads to a decrease in the demand for the other product.
- If the cross elasticity of demand is zero, it indicates that the two products are unrelated. The change in price of one product has no effect on the demand for the other product.

Importance of Elasticity of Demand:
1. Pricing strategy: Understanding the price elasticity of demand helps businesses determine the most appropriate pricing strategy. If demand is elastic, a decrease in price can lead to a significant increase in quantity demanded, allowing businesses to capture a larger market share. If demand is inelastic, businesses can increase prices without a significant drop in demand, maximizing their profits.

2. Revenue forecasting: Elasticity of demand allows businesses to forecast their revenues accurately. By knowing the price elasticity, businesses can estimate the impact of price changes on total revenue. For elastic goods, a decrease in price may lead to increased revenue, while for inelastic goods, a price increase may result in higher revenue.

3. Decision-making: Elasticity of demand helps businesses make informed decisions regarding production levels, inventory management, and resource allocation. By understanding how changes in price or related products' prices affect demand, businesses can optimize their operations and resources accordingly.

4. Government policies: Elasticity of demand is crucial for policymakers to design effective taxation policies, subsidies, or regulations. For highly elastic goods, imposing taxes may lead to decreased consumption, while for inelastic goods, taxes may not significantly impact demand.

5. Market competition: Elasticity of demand enables businesses to assess the competitiveness of their products. If demand for a product is highly elastic, it means consumers have many alternatives, and businesses need to differentiate themselves to attract customers.

In conclusion, the concept of elasticity of demand is essential for businesses, policymakers, and economists to understand the responsiveness of quantity demanded to