Please explain the concept of price elasticity of demand

Price elasticity of demand describes how the demand for a good responds to a change in its price. This is calculated by dividing the percentage change in Quantity demanded by percentage change in Price (always remember that you Q before you P!). For the vast majority of goods, this will be a negative number, as normally customers demand less of a good when its price increases. If the price elasticity of demand is between -1 and 0 then demand for the good is inelastic. This means that demand has fallen by a smaller proportion than the price increase, which often means the good is a necessity. Even if toothpaste doubled in price, you are unlikely to stop brushing your teeth completely! If the price elasticity of demand is less than -1 then demand has fallen proportionately more than the price increase; demand for this good is elastic. This is often the case when there are lots of alternatives available (known as substitutes), for example if the price of Coke doubled then you could easily start drinking Pepsi instead! These examples show that price elasticity of demand is often determined by consumer preferences as well as the number of substitutes available.

Answered by Frederica M. Economics tutor

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