define elasticity of demand
Define elasticity of demand
Answer:
Elasticity of demand is a concept used in economics to measure the responsiveness of the quantity demanded of a good or service to a change in its price. It indicates how much the quantity demanded of a product changes in response to a change in its price. The formula for calculating the price elasticity of demand is:
\text{Price Elasticity of Demand} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}}
There are different types of demand elasticity:
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Price Elastic Demand: When the percentage change in quantity demanded is greater than the percentage change in price, the demand is considered elastic. This means that a small change in price leads to a relatively larger change in the quantity demanded.
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Unit Elastic Demand: Unit elastic demand occurs when the percentage change in quantity demanded is equal to the percentage change in price. In this case, the total revenue remains constant when the price changes.
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Price Inelastic Demand: If the percentage change in quantity demanded is less than the percentage change in price, the demand is inelastic. This means that a change in price leads to a proportionally smaller change in the quantity demanded.
Understanding the concept of elasticity of demand is crucial for businesses and policymakers to make informed decisions about pricing, production, and market strategies.