In economics, the price elasticity of demand measures the responsiveness of the quantity demanded of a good to its price.
It is measured as the percentage change in demand that occurs in response to a percentage change in price. For example, if, in response to a 10% fall in the price of a good, the quantity demanded increases by 20%, the price elasticity of demand would be 20%/-10% = -2.
In general, a fall in the price of a good would be expected to increase the demand, so we would expect the price elasticity of demand to be negative as above. Note that in the economics literature the minus sign is often omitted.
It may be possible that demand for a good rises as its price rises, even under conventional economic assumptions of consumer rationality. Two such classes of goods are known as Giffen goods or Veblen goods.
Various research methods are used to calculate price elasticity:
- Test markets
- Analysis of historical sales data
- Conjoint analysis
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