Price Elasticity of Demand
Definition of 'Price Elasticity of Demand'
PED is a key concept in microeconomics, as it helps to explain how changes in price affect consumer behavior. A good with a high PED is one whose quantity demanded changes significantly in response to a change in price. For example, if the price of gasoline increases by 10%, the quantity demanded of gasoline may decrease by 20%. This means that gasoline has a high PED.
A good with a low PED is one whose quantity demanded changes little in response to a change in price. For example, if the price of salt increases by 10%, the quantity demanded of salt may only decrease by 1%. This means that salt has a low PED.
The PED of a good is important because it can help businesses to determine how changes in price will affect their sales. For example, a business that sells a good with a high PED may be more likely to increase its price, as it knows that this will not lead to a significant decrease in sales. Conversely, a business that sells a good with a low PED may be more likely to decrease its price, as it knows that this will lead to a significant increase in sales.
The PED of a good can also be used to predict the impact of government policies on the market for that good. For example, a government policy that increases the price of a good with a high PED is likely to lead to a decrease in the quantity demanded of that good. Conversely, a government policy that decreases the price of a good with a low PED is likely to lead to an increase in the quantity demanded of that good.
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