Price Elasticity of Demand (EDP, PED or Ed) is an economic term that expresses the sensitivity of quantity demanded of a good on its price.
It is expressed using the coefficient of price elasticity of demand, which expresses by how many percent the quantity demanded will increase / decrease, when the price will increase / decrease by one percent:
EDP = ((Q2-Q1):((Q2+Q1):2) ):((P2-P1):((P2+P1):2))
According to the size of the coefficient it is distinguished:
- Perfectly inelastic demand - quantity demanded does not change with the price change, EDP=0
- Inelastic demand - change in price causes a smaller percentage change in quantity demanded, EDP<1
- Unit elastic demand - change in price causes the same percentage change in quantity demanded, EDP=1
- Elastic demand - change in price causes a greater percentage change in quantity demanded, EDP>1
- Perfectly elastic demand - at a certain price any amount of goods is sold, EDP=∞
Price elasticity of demand in practice: Knowledge of the elasticity of the supplied products or services is important in pricing (setting and changing prices). It has an impact on the promotion and advertising campaigns. The coefficient of price elasticity of demand (EDP) is used either to calculate the anticipated impacts of price changes on quantity demanded or even more for the re-calculation of the elasticity value of a specific product - that is, to know how customers respond to the price change for given product. In practice, it should be cleaned by other external influences, such as the particular market situation (when the market generally increases, thus in a strong demand, it will have a different effect on the elasticity than when the market is in recession.
The coefficient indicates by how many percent the quantity demanded increases or decreases, when the price increases or decreases by one percent.
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