Elasticity is an easy way of enumerating cause and effect correlations. It is described normally as a mathematical measure of the responsiveness of one economic variable (the dependant variable) following a change in another influencing variable (the independent variable), ceteris paribus.
Now we shall understand what Price Elasticity of demand (PED) is, it is the measure of responsiveness of demand for a good following an alteration in its own price. If demand is elastic, then a little transform in price will consequence in a comparatively big change in amount demanded. However, if price increases by too much and quantity demanded descends vaguely, then demand would be price inelastic. (Hubbard and O'Brien, 2008)
If co-efficient of PED = 0, it means that demand is perfectly inelastic. This means that any change in price whether increase or decrease does change the quantity demanded. Hence making its demand curve a vertical line in price(x axis) to quantity(y axis) space.
If co-efficient of PED is between 0 and 1, when we get values of PED between 0 and 1 than we say PED to be inelastic this means that percentage change in demand is lesser than percentage change in price. Producers know that the change in demand will be proportionately smaller than the percentage change in price. ...
Producers know that the change in demand will be proportionately smaller than the percentage change in price. Therefore Demand curve will be a very steep slanting line in price(x axis) to quantity(y axis) space.
If co-efficient of PED = 1, when a percentage change in price changes the percentage of quantity demanded by the same proportion the PED is said to be unitary elastic. For example a 10% rise in the price of apples causes a 10% fall in its quantity demanded.
If co-efficient of PED > 1, when the value of PED exceeds 1 then demand is said to be elastic, which means that a % change in price causes the quantity demanded to change by more than proportionate. For example a 10% rise in prices of apples cause its quantity demanded to drop by 15%. (Lipsey & Chrystal, 2007; Sloman, 2006)
Factors Determining Price Elasticity of Demand:
Now let us take a look at the key factors that determines the PED for goods and services. They are as follows:
The range of near substitutes for a product / attractiveness of the good- the more the number of substitutes of a good the more elastic would be its demand because consumers can easily turn to other alternative good. For example coke's perfect substitute is Pepsi, and therefore if coke raises its price people will turn to Pepsi instead. And the more the product is unique the more inelastic would be its demand. (Tucker, 1999; Samuelson & Nordhaus, 2001)
The fee of toggling amid different products - there may be noteworthy dealings expenses caught up in changing among dissimilar goods and services. For example, mobile phone service suppliers may incorporate penalty clauses in agreements or persevere on 12-month