1. Price Elasticity of Demand
· What it is: Measures how much quantity demanded changes when price changes.
· Why usually negative: Price and quantity demanded move in opposite directions (Law of Demand).
2. Elastic vs. Inelastic Goods
· Elastic (|E_d| > 1): Quantity changes a lot with price (e.g., restaurant meals, luxury goods).
· Inelastic (|E_d| < 1): Quantity changes little with price (e.g., insulin, salt).
· Why differences: Depends on substitutes, necessity, share of budget, and time horizon.
3. Real-Life Example & Perfect Cases
· Example: Gasoline prices rise → people drive less over time (elastic in long run).
· Why rare: Perfectly inelastic (no substitutes, absolute necessity) or perfectly elastic (identical alternatives at fixed price) are extreme theoretical cases; real markets have some substitutability and competition.
4. Factors Affecting Price Elasticity
1. Availability of substitutes
2. Necessity vs. luxury
3. Share of consumer’s budget
4. Time period (long run vs. short run)
5. Habit/addiction
5. Business Use of Elasticity
· Pricing: If demand is elastic, lower price to raise revenue; if inelastic, raise price.
· Forecasting: Predict sales impact from price changes.
· Strategy: Identify market segments with different elasticities for targeted pricing.