Price elasticity
Price elasticity is a concept from economics that measures the change in demand for a good or service in response to a change in its price. It is often used to understand how consumers respond to price changes and is of great importance to businesses in determining their pricing strategies.
Practical applications of price elasticity
Price elasticity is expressed as a percentage change in the quantity of goods or services demanded divided by the percentage change in price. For example, if price elasticity is -2, it means that a 1% increase in price leads to a 2% decrease in demand. Price elasticity can range from elastic (larger changes in demand than changes in price) to inelastic (smaller changes in demand than changes in price).
A high price elasticity suggests that consumers are sensitive to price changes and that firms should be cautious in raising their prices. In contrast, a low price elasticity indicates less sensitive demand, allowing firms more flexibility in adjusting prices. Price elasticity is crucial in determining optimal pricing strategies to maximize profits and maintain market share.
