Explain the concept of price elasticity of demand.

Price elasticity of demand or PED is a very useful concept in microeconomics. In order to understand this, lets quickly talk about what demand is. Demand in economics refers to the willingness and ability of a consumer to buy goods and services at different price points. PED, technically speaking, is how responsive consumers are to a change in price, or alternatively, how much the quantity demanded of a good changes when the price changes. Mathematically speaking, this can be represented through an equation: (%) change in the quantity demanded / (%) change in the price. We are only concerned with the absolute value of the number calculated because the PED will always be negative due to the law of demand (as price increases, demand decreases and vice versa). If the absolute value is less than 1, then it can be said that the PED of a good is inelastic. This means that consumers are fairly unresponsive to price changes: the change in the quantity of a good demanded is proportionally lower than the change in price. For example, cigarettes tend to have an inelastic demand as they are addictive goods, meaning that even if the price for them increases, smokers will continue to purchase cigarettes at the same rate. On the contrary, if the absolute value is greater than 1, then the good is elastic implying that consumers are highly responsive to changes in price: the change in the quantity of a good demanded is proportionally higher than the change in price. An example of an elastic good is Uncle Ben’s rice because it is a very specific brand in the rice industry with other alternatives available; consumers will start buying rice from other brands like Tilda if Uncle Ben decided to boost their prices. Lastly, if the PED is exactly 1 then the good is unit elastic, meaning that the change in quantity demanded is exactly proportional to the price change.                                       

Answered by Abheek D. Economics tutor

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