Price Elasticity

Price elasticity is a measure of how sensitive demand or supply is to a change in price.

Price elasticity is a way of measuring how demand and supply will respond when faced with a change in price. It is expressed as a numerical value that corresponds to the rate at which demand or supply changes. To understand it better, price elasticity takes the ratio of the percentage change in quantity demanded (in response to a change in price) divided by the percentage change in price. Generally, the closer the value is to 0, the more inelastic demand or supply is; the closer it is to infinity, the more elastic it is.

Price elasticity can be used to measure both demand and supply. When measuring demand, it can help investors and other businesses understand the extent to which people are willing to buy a product when the price changes. On the other hand, it can measure how much suppliers are willing to produce with a certain price change. This information can be used for decision making and to set prices.

For example, an electronics store may be making decisions on how to price their products. The store may decide to look into the effect of different prices on demand. To do this, they might look into the price elasticity of demand for their products. If, after looking at their data, they found that demand for their products was elastic (values closer to infinity) then they may decide to adjust their pricing structure accordingly in order to maximize their profits. If, on the other hand, they found that demand for their products was inelastic (values closer to zero), then they may decide to price their products less aggressively.