# Demand Elasticity

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## Definition of 'Demand Elasticity'

Demand elasticity is a measure of the responsiveness of demand for a good or service to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Demand elasticity is important for businesses because it helps them understand how changes in price will affect their sales. A product with high demand elasticity will see a large change in demand for a small change in price, while a product with low demand elasticity will see a small change in demand for a large change in price.

There are two types of demand elasticity:

* **Price elasticity of demand:** This measures the responsiveness of demand to a change in price.
* **Cross-price elasticity of demand:** This measures the responsiveness of demand for one good to a change in the price of another good.

Price elasticity of demand is typically measured using the following formula:

```
% change in quantity demanded / % change in price
```

Cross-price elasticity of demand is typically measured using the following formula:

```
% change in quantity demanded of good A / % change in price of good B
```

The demand for most goods is elastic, meaning that a small change in price will lead to a large change in demand. However, there are some goods that are inelastic, meaning that a large change in price will have little effect on demand.

The demand for a good is more elastic when there are more substitutes available. For example, the demand for gasoline is elastic because there are many other ways to get around, such as public transportation, walking, or biking. The demand for a good is also more elastic when the good is a luxury item. For example, the demand for a new car is more elastic than the demand for food.

Businesses can use demand elasticity to make pricing decisions. For example, a business that sells a product with high demand elasticity can charge a higher price because customers are less likely to switch to a competitor if the price increases. Conversely, a business that sells a product with low demand elasticity must be careful not to raise prices too much, or they will lose customers.

Demand elasticity is a complex concept, but it is an important tool for businesses to understand. By understanding demand elasticity, businesses can make better pricing decisions and increase their profits.

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