Question

What is the best way to explain PRICE ELASTICITY OF DEMAND. Can you give me an example that will allow me to better understand this concept, please?

Answer 1

• The price of demand explains the responsiveness of a goods demand with respect to the changes in its price.
• If the price elasticity of demand is greater than 1 , the demand of a product is said to be highly elastic as the demand is highly responsive to the changes in its price.
• Similarly when the price elasticity of demand is less than 1 the good is said to have relatively inelastic demand, as the quantity demanded change is smaller than its price.
• When the price elasticity of demand is equal to 1 then the good is said to be unitary elastic.
• For example elastic goods includes vehicles, furnitures, transport services etc. Its price elasticity of demand is greater than 1 as it has more substitutes and the price change effects the quantity demanded.
• Examples of inelastic goods include electricity,gas, water etc , their price elasticity of demand is less than 1 as they have fewer substitutes and the price change does not effect the quantity demanded.
• Examples of unitary goods include clothing, as price elasticity of demand is equal to 1.