Price Elasticity Of Demand Flashcards, test questions and answers

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What is Price Elasticity Of Demand?

Price elasticity of demand is a measure of the relationship between a change in the price of a good or service and the quantity demanded for that same product. It measures how responsive consumers are to changes in prices, and provides an indication as to how much demand for a product will change when its price does. Generally speaking, if the price elasticity of demand is greater than one (1), then demand is said to be elastic, which means that any increase in price will cause a larger decrease in the quantity demanded. Conversely, if the price elasticity of demand is less than one (1), then demand is said to be inelastic, which suggests that any increase in price has only minimal effects on quantity demanded. The concept of price elasticity can be used by firms and businesses to determine what pricing strategy they should adopt in order to maximize their profits. For example, if there is low-price elasticity, meaning people are still willing to buy despite increases in prices, this could suggest raising prices would result in increased profits due to fewer sales being lost from those who cannot afford it at higher prices. On the other hand, if there were high-price elasticity for an item meaning people are very sensitive about any increases and likely won’t purchase it anymore regardless lowering prices may lead to more customers buying but with lower profit margins as well.It’s important for businesses and organizations alike to consider how their pricing strategies might affect consumer behavior before implementing them.