TYPES OF INFLATION AND SHARES| CUET ECONOMICS| L-7

What is price elasticity of demand?

Price elasticity of demand is the ratio of the percentage change in quantity demanded of a product to the percentage change in price. Economists employ it to understand how supply and demand change when a product’s price changes.

What makes a product elastic?

If a price change for a product causes a substantial change in either its supply or its demand, it is considered elastic. Generally, it means that there are acceptable substitutes for the product. Examples would be cookies, luxury automobiles, and coffee.

What makes a product inelastic?

If a price change for a product doesn’t lead to much, if any, change in its supply or demand, it is considered inelastic. Generally, it means that the product is considered to be a necessity or a luxury item for addictive constituents. Examples would be gasoline, milk, and iPhones.

What is the importance of price elasticity of demand?

Knowing the price elasticity of demand for goods allows someone selling that good to make informed decisions about pricing strategies. This metric provides sellers with information about consumer pricing sensitivity. It is also key for makers of goods to determine manufacturing plans, as well as for governments to assess how to impose taxes on goods.