Price Sensitivity

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Definition of 'Price Sensitivity'

Price sensitivity is a measure of how responsive demand for a good or service is to changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Price sensitivity is an important concept in economics because it helps to determine how firms set prices and how consumers make purchasing decisions. Firms that are able to charge a higher price for their products or services are more profitable, while consumers who are more sensitive to price changes are more likely to switch to a lower-priced alternative.

There are a number of factors that can affect price sensitivity, including the availability of substitutes, the importance of the product or service to the consumer, and the consumer's income. In general, products with few substitutes, products that are essential to the consumer, and products that are purchased by consumers with low incomes are more price-sensitive than other products.

Price sensitivity can be measured in a number of ways. One common method is to conduct a survey of consumers and ask them how much they would be willing to pay for a product or service at different prices. Another method is to track sales data over time and see how changes in price affect sales volume.

Price sensitivity is an important concept for both businesses and consumers. Businesses need to understand how price sensitivity affects their sales in order to set prices that maximize their profits. Consumers need to understand their own price sensitivity in order to make informed purchasing decisions.

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