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Elasticity of demand - Definition |
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In economics, the price elasticity of demand measures the responsiveness of the quantity demanded of a good to its price. The formula used to calculate the coefficient of price elasticity of demand is
- <math>E_d = \frac{%\ \rm{change}\ \rm{in}\ \rm{quantity}\ \rm{demanded}\ \rm{of}\ \rm{product}\ X}{%\ \rm{change}\ \rm{in}\ \rm{price}\ \rm{of}\ \rm{product}\ X}.<math>
Price elasticity of demand is measured as the percentage change in quantity demanded that occurs in response to a percentage change in price. For example, if, in response to a 10% fall in the price of a good, the quantity demanded increases by 20%, the price elasticity of demand would be 20%/(− 10%) = −2.
- <math>\frac{0.2}{-0.1}=-2<math> price elasticity
In general, a fall in the price of a good would be expected to increase the quantity demanded, so we would expect the price elasticity of demand to be negative as above. Note that in the economics literature the minus sign is often omitted.
It may be possible that quantity demanded for a good rises as its price rises, even under conventional economic assumptions of consumer rationality. Two such classes of goods are known as Giffen goods or Veblen goods.
Various research methods are used to calculate price elasticity:
See also
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