The price elasticity of demand is important because it illustrates the effect that a change in price has on the quantity demanded of a particular good. It may be perfectly elastic, perfectly inelastic or somewhere between the two.Know More
The price elasticity of demand is determined by dividing the percentage change in the quantity demanded by the percentage change in price. According to Investopedia, when the quotient is zero, price demand is perfectly inelastic. This means that demand does not change when the firm changes the price. In other words, the firm can raise its prices to generate more revenue, without seeing a decrease in sales. A quotient between zero and one means that demand is inelastic, and the percentage change in quantity demanded is less than the percentage change in price. When the quotient is one, price demand is unit elastic, and a change in price yields an equal but inverse change in the quantity demanded. A quotient above one means that demand is perfectly elastic and that a change in price will have a greater effect on the quantity demanded.
Firms whose products have strong brand identity and few substitutes have greater inelasticity; manufacturers of luxury goods are a good example. Firms that sell generic goods with many substitutes have elastic or perfectly elastic demand; commodities such as corn and wheat are perfectly inelastic.Learn more about Economics
The multiplier effect refers to the ability of sudden, increased demand to create additional demand in local goods and services. Money that is injected into a region, be it through government spending on local infrastructure, new investment by businesses or tourism, creates the effect.Full Answer >
Price elasticity of demand has four determinants: product necessity, how many substitutes for the product there are, how large a percentage of income the product costs, and how frequently its purchased, according to Economics Help. By using these determinants, businesses can estimate how a change in the price affects demand.Full Answer >
Price elasticity of demand illustrates how the quantity demanded of a good is affected by the change in price of that good. The determinants of price elasticity of demand are the availability of substitutes, size, durability and time.Full Answer >
Economics and economic education are important for providing people with valuable insight into how foreign and domestic markets operate, which allows them to make reasoned and rational choices for short-term and long-term financial benefits. Studying economics also allows people to learn how to manage and most effectively use scare and finite resources such as time and money. Studying economics equips people with varying levels of financial literacy, which allows them to effectively manage their own finances and even advise others in financial management and planning, too.Full Answer >