Business, Legal & Accounting Glossary
The elasticity of demand, also known as price elasticity of demand is a variation of demand. It can be categorized as unitary, elastic and inelastic. It is defined as how much the demand for a particular commodity change with a change of its price.
In elastic demand, when the price changes the quantity demanded is highly affected. Such examples include durables (items bought infrequently) which can be purchased at a later date; they are not necessary for living today. Examples include homes and cars.
If a comparable item can be substituted for the product in question, buyers may consume more of that item if it becomes cheaper. An example could be consumers buying generic brands in a supermarket instead of high-profile national brands. These products that are easily substitutable have a tendency to have elastic demand.
It would be inelastic if people continued to buy petrol despite the increase in prices; the change in quantity could still exist, but it would be small. Items which are essential to everyday living and cannot be postponed (non-durables) tend to be inelastic. For example, if the prices of staple foods increase, consumers have no choice but to keep buying them.
The factors that play a crucial role in price elasticity of demand include:
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This glossary post was last updated: 29th March, 2020 | 0 Views.