Elasticity of Demand Essay

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Price elasticity of demand is a measure of the responsiveness or sensitivity of the quantity demanded of a particular product to changes in it price. It is calculated at the percentage change in quantity demanded by the percentage change in its price. It is important to understand the price elasticity of demand in order to find out the optimal pricing strategy for the product. There are various types of elasticity including elastic demand, inelastic demand and unit elastic demand. When prices have a large impact on the demand of a product it is said to be elastic in demand. For example, a fall in price would lead to an increase in demand and an increase in price would lead to a fall in demand. On the other hand if the same situation led to a less than proportionate change in quantity demanded, than it can be said that the product is inelastic in demand. If the proportionate change in quantity demanded is equal to the proportionate change in price, the demand is unit elastic. There are many ways to measure the price elasticity of demand however the easiest way to do it is by comparing the change in price to the total revenue earned by the producer, known as the total outlay method. The total outlay is found by multiplying the price of the product by the quantity demanded at that price. If the total outlay moves in the same direction as the price change, demand is relatively inelastic. Alternatively, if the total outlay moves in the opposite direction to the price change, demand is relatively elastic. Also, if the total outlay is the same following the price change than the demand is unit elastic. There are two extremes when it comes to elasticity of demand – perfectly elastic demand and perfectly inelastic demand. These two extremes cannot be measured using the total outlay method and can only be illustrated by looking at the slope of demand

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