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Price Elasticity of Demand Video Lecture | Business Economics for CA Foundation

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FAQs on Price Elasticity of Demand Video Lecture - Business Economics for CA Foundation

1. What is price elasticity of demand and how is it calculated?
Ans. Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to changes in its price. It indicates how sensitive consumers are to changes in price. The formula to calculate price elasticity of demand is: Price Elasticity of Demand = % change in quantity demanded / % change in price.
2. What factors determine the price elasticity of demand?
Ans. Several factors determine the price elasticity of demand. Some of the key factors include the availability of substitutes, the necessity of the product, the proportion of income spent on the product, and the time period under consideration. If a product has close substitutes, is considered a necessity, represents a large portion of a consumer's income, or if consumers have more time to adjust their consumption patterns, the price elasticity of demand tends to be higher.
3. How does price elasticity of demand affect pricing strategies?
Ans. Price elasticity of demand plays a crucial role in determining pricing strategies. When demand is price elastic, meaning that a small change in price leads to a significant change in quantity demanded, businesses may choose to lower prices to attract more customers and increase revenue. On the other hand, if demand is price inelastic, meaning that a change in price has a relatively small impact on quantity demanded, businesses may choose to increase prices to maximize profits.
4. Can price elasticity of demand be negative?
Ans. Yes, the price elasticity of demand can be negative. In economics, price elasticity of demand is generally expressed as an absolute value to indicate the responsiveness of quantity demanded to changes in price. However, when calculating the elasticity using the midpoint method, the negative sign is retained to indicate the inverse relationship between price and quantity demanded. A negative price elasticity of demand suggests that as the price increases, the quantity demanded decreases.
5. How does price elasticity of demand affect total revenue?
Ans. Price elasticity of demand has a direct impact on total revenue. When demand is price elastic (elasticity greater than 1), a decrease in price leads to a proportionally larger increase in quantity demanded, resulting in higher total revenue. Conversely, when demand is price inelastic (elasticity less than 1), a decrease in price leads to a proportionally smaller increase in quantity demanded, resulting in lower total revenue. The optimal pricing strategy for maximizing total revenue depends on the price elasticity of demand.
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