Definition of Price Elasticity
The degree to which the demand for a product or service varies with its price.
Explanation of Price Elasticity
Price elasticity refers to the measure of how the quantity demanded of a product or service changes in response to a change in its price. It indicates the sensitivity of consumers to price fluctuations. For example, if a small increase in the price of a product leads to a significant drop in its demand, the product is considered to have high price elasticity. Conversely, if demand remains relatively stable despite price changes, the product has low price elasticity. Understanding price elasticity helps businesses set optimal pricing strategies. Products with high elasticity might require careful pricing adjustments to avoid losing customers, while those with low elasticity can tolerate higher price changes without significantly impacting demand. Factors influencing price elasticity include the availability of substitutes, the necessity of the product, and consumer income levels. By analyzing price elasticity, businesses can make informed decisions about pricing, promotions, and product positioning to maximize revenue and market share.