Price Elasticity of Demand is an estimate of change in quantity demanded of a particular product to change in its price. The formula for estimation of price elasticity of demand is:-
Price Elasticity Of Demand=%change in quantity demanded/%change in price.
If the quantity demanded is more as compared to the change in price then the product is elastic in nature, whereas when the change in price is more as compared to the change in quantity demanded then the product is said to be inelastic in nature.
Why is price elasticity of demand is essential for a firm?
The feeling of uncertainty can be reduced by getting feedback from the consumers according to change in price of product. It will be helpful in the estimation of sales and price determination. Likewise, estimation of change in price has an effect on sales volume or sales revenue. For example, Suppose there are 1000 products and the price elasticity of demand of the product is (-2), a 10% decline in price (from 100 rupees to 90 rupees), which will result in 20% increment in sales(1000 to 1200). In this case revenue will increase from 100000 rupees to 108000 rupees.
Having a better insight of price elasticity of demand helps to determine whether the price will be raised or declined or wheather it will be discriminate. Price determination is the process of charging different prices for same product. If there is elasticity in demand, the revenue will increase by reducing price, whereas if it is inelastic the price will rise and revenue will be less.
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