Price elasticity of demand and supply are major factors of economics, investment, and market strategies. Because of the rising or falling trends in supply and demand, the cost of goods and services constantly fluctuates in a market ecosystem. However, you must only consider the demand to comprehend what the price elasticity of demand means. In this article, you will find comprehensive details of the price elasticity of demand and the details about relations with any debit card or other financial instrument.
What is the price elasticity of demand?
The relationship between the percentage change in a product’s quantity demanded, and the percentage change in price, is known as price elasticity of demand. It helps economists comprehend how supply and demand shift in response to product price changes.
A product is considered elastic if a price change results in a sizable change in its supply or demand. Generally speaking, it denotes that there are suitable alternatives to the product.
A product is said to be inelastic if a price change doesn’t result in much, if any, change in its supply or demand. It indicates that the substance’s addictive constituents consider the product a luxury or a necessity.
Types of price elasticity of demand
There are mainly two types of price elasticity of demand.
- Arc elasticity
- Point elasticity
What can affect the price elasticity of demand?
- Similar Products available in the market
The most important factor is the presence of similar products in the market. In this scenario, When prices rise, customers switch to similar products, which reduces demand. Due to the increased price sensitivity of substitute products, there is a need for competitive pricing to keep customers. Electricity is an example of a good with inelastic demand because there are no substitutes.
- Primary goods
Based on the demand for the product, price elasticity can always vary. For instance, medicine and food always have inelastic demand. On the other hand, luxury items like beauty care, smart devices, fashion items, etc, have elastic demand.
- Income range of end users or consumers
Consumer income also has an impact on the price elasticity of demand. Demand is more elastic for lower-income consumers because they are more sensitive to price increases, which has a greater effect on demand. A great metric that can show the income range of end users is a zero balance bank account open.
- Time frame
Consumers cannot delay consumption when prices rise, so the demand for perishable goods is inelastic. Durable goods have elastic demand because consumers can delay purchases or buy in bulk when they anticipate price increases. To save money, many customers watch for price drops on recently released electronic devices, etc.
- Behavior and habits of consumers
The price elasticity of demand can also be represented by consumer behaviour of spending money from their saving bank account or any other account. Loyalty to a specific brand or product may result in an inelastic demand.
Calculation of price elasticity of demand
There is an absolute way to determine the price elasticity of demand. Here is the formula which you can use.
Price elasticity of demand(PED) = % change in the quantity demanded / % change in price
Symbols like those mentioned below can simplify this formula.
PED = [(Q2 – Q1) / (Q1 + Q2)] ÷ [(P1 – P2) / (P1 + P2)]
Here,
- Q1 is the initial quantity demanded
- Q2 is the quantity demanded after the price change
- P1 is the initial price
- P2 is the changed price
Coefficient of price elasticity of demand
Regarding coefficients, economists gauge the price elasticity of demand (PED). A product’s demand can be elastic, perfectly elastic, inelastic, or perfectly inelastic in response to a change in price, depending on the coefficient. You must realize that the coefficient will be negative because price and demand move in opposite directions. You can understand your financial moves if you can use any online payment app.
- Perfectly inelastic, i.e. PED= 0
- Inelastic, i.e. PED= between 0 and 1
- Elastic/ unit elastic i.e. PED= 1
- Perfectly elastic, i.e. PED> 1
Conclusion
With the help of the price elasticity of demand, business owners, investors, economists, etc., can make a strategic decision. Based on their saving account or investment details, you can maximize the benefits. The whole market is controlled by price, profit, and market information. To get more information, you can take help from various financial apps. Online financial apps are way better to inform such important things in a very effective way.