Definition of Elasticity of Demand
A measure of how the quantity demanded of a good responds to a change in its price.
Explanation of Elasticity of Demand
Elasticity of Demand is an economic concept that measures the responsiveness of the quantity demanded of a good or service to a change in its price. If a small change in price leads to a significant change in quantity demanded, the demand is considered elastic. Conversely, if a change in price has little effect on the quantity demanded, the demand is inelastic. This concept is crucial for businesses when setting prices, as it helps them understand how price changes might impact sales and revenue. For example, if a product has elastic demand, a price increase might lead to a significant drop in sales, whereas a price decrease could boost sales significantly. Factors influencing demand elasticity include the availability of substitutes, the proportion of income spent on the good, and the necessity of the product. Understanding elasticity helps businesses make informed decisions about pricing strategies, promotional offers, and product development, ultimately influencing their profitability and market position.