definition of elasticity of demand
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Demand elasticity measures a change in demand for a good when another economic factor changes. Demand elasticity helps firms model the potential change in demand due to changes in the price of a good, the effect of changes in prices of other goods, and many other important market factors. A grasp of demand elasticity guides firms toward more optimal competitive behavior and allows them to make precise forecasts of their production needs. If the demand for a good is more elastic in response to changes in other economic factors, companies must use caution when raising prices.
Types of Demand Elasticities
One common type of demand elasticity is the price elasticity of demand, which shows the responsiveness of the quantity demanded for a good relative to a change in its price. Firms collect data on price changes and how consumers respond to such changes. They then later calibrate their prices accordingly to maximize profits. Another type of demand elasticity is cross-elasticity of demand, which is calculated by taking the percent change in quantity demanded for a good and dividing it by the percent change of the price for another good. This type of elasticity indicates how demand for a good reacts to price changes of other goods.
Elasticity of demand is a measure used in economics to show the responsiveness, or elasticity of the quantity demanded of a good or service to a change in its price when nothing but the price changes.
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