Price elasticity of demand is used to measure the relation between the Change in the demanded quantity of a product and a change in its price. This article talks about the price elasticity of demand; after reading this article, you will learn about the price elasticity of demand and the factors that influence the price elasticity of demand. Many factors affect the price elasticity of demand, e.g., the nature of goods, distribution of income, etc.

The formula of Price Elasticity

Formula of Price Elasticity
Generally, when the product's price increases, the demand for that product decreases, but there are some exceptions. Because of price changes, consumers can also buy substituted goods. Price elasticity can be positive or negative, but it is usually harmful. Positive elasticity means when a product's price increases and then demand for that product also increases. There are many luxury products whose demand is not affected by price, and thirsty items whose demand is not affected by price, e.g.,rol – Consumers will use Petrol as much as they used before the price changes. You can calculate the price elasticity utilizing a formula, PE=Change in Quantity demanded ÷ Change in price.

The formula is quite simple: the percentage of Change that has come in quantity must be divided into the Change that has come in the price.

What factors impact price elasticity?

Many factors affect the price elasticity, e.g.,. Nature of goods, substitute of goods, price of product, distribution of income, postponement of product, price level, number of uses of a good proportion of total expenditure, and others. Here are the factors that influence price elasticity demand.
  • Nature of Goods – This is a vital factor affecting price elasticity. Nature of Goods is classified into three categories: essential goods, comforts, and luxuries.
  • Essential Goods - These are products whose price does not affect the price elasticity. The consumer will consume essential goods whether prices increase, e.g., Petrol. The demand for crucial goods is inelastic.
  • Comforts – These are goods whose price does affect the price elasticity. For example, if the price of an air conditioner decreases, then its demand will increase. Mo, whose income is I'm, cited they consume these products when the price decreases, cases, and the hen prstartstto increase,ases then demand decreases.
  • Luxury - Examples of luxury products are expensive jewelry, cars, etc. These luxury items are highly elastic. When prices of luxury goods change, it affects the elasticity of demand. The consumer will buy more gold when prices are low.
  • Availability of Substitute- substitute products always affect the elasticity of demand. For example, tea and coffee are close substitutes. When coffee prices increase, consumers can buy tea because these are close substitutes, so when coffee prices rise, the demand for tea will automatically grow.
  • Distribution of Income- Distribution of income affects the price elasticity of demand because those consumers whose income is limited will buy a product when the price of that product decreases. It will influence the elasticity of demand.
  • Price of Product – For example, many companies make toothpaste; if a company reduces the price of its toothpaste, then many consumers will buy the product, and it will also affect the elasticity of demand. Price is a significant factor that influences the elasticity of demand.

How do we classify products based on the price elasticity of demand?

  • Perfectly elastic products – These are some products when the prices of those products change, their elasticity of demand. These products are referred to as pure commodities.
  • Relatively elastic products – For example, if ticket prices start decreasing, demand will increase in the price of air tickets.
  • Unit elastic products- The prices and demand of these products will change.
  • Relatively inelastic products – These are some products when the prices of those products change, but they do not affect the elasticity of demand.
  • Perfectly inelastic products – For, e.g., essential items like Petrol, any price change will not affect Petrol's demand.