Price elasticity of demand – It measures the degree of responsiveness of the quantity demanded of a good to a change in its price.
Let
Initial price = P Final price = P1
Initial quantity = Q Final quantity = Q1
Change in quantity (ΔQ) = Final quantity - Initial quantity
= Q1 – Q
Change in price (ΔP) = Final price - Initial price
= P1 - P
Ed % change in quantity demanded % change in price
Price elasticity of demand has negative sign as it shows inverse relationship between price and quantity demanded. Elasticity of demand has no unit as it’s a coefficient.
Factors affecting Price Elasticity of demand
i) Number of Substitutes - A commodity will have elastic demand if there are more number of substitutes available. E.g.- Pepsi, Coca-Cola, and Frooti etc. A commodity having less number of substitutes, such as salt will have inelastic demand.
ii) Nature of the Commodity- Generally, the demand for necessities is inelastic (less elastic) and demand for luxuries is elastic (more elastic). This is so because certain goods which are essential to life will be demanded at any price, whereas goods meant for luxuries can be disposed off easily if they appear.
iii) Different uses of commodity- If the commodity has different uses its demand will be elastic.
iv) Habits- Commodities in habit of the consumers have less price elasticity.
v) Level of income - If consumer belongs to richer section then his demand will not be affected by change in price, hence demand will be inelastic.
