3.1 Briefly explain price elasticity of demand and how it is measured. (5) 3.2 Explain any...

3.1 Briefly explain price elasticity of demand and how it is measured. (5) 3.2 Explain any THREE (3) determinants of price elasticity of demand. (6

Expert Solution

Price elasticity of demand is the percentage change in the demand for a good in response to percentage change in the price of a good. Usually, it is called as the percentage change in the demand for a good for 1% change in the price of a good.

Price elasticity of demand is independent of the unit of measurement. Formula for calculating the price elasticity of demand is following

Price elasticity = (?Q/?P)×(P/Q)

In the above P is the price while Q is the quantity.

The three main determinants of price elasticity of demand are following

Existence of substitutes: If a good has number of close substitutes, then the price elasticity of demand for that good will be very high. Meaning a small change in the price of the good will result in large change in the demand for the good. The opposite is true for a good for which there are very few or no close substitutes.

Income spent: If the proportion of total income spent on the good is high, then the price elasticity of demand for that good will also be very high and visa-versa.

Number of uses: A good which has large number of uses, will have higher price elasticity of demand as compared to a good that has few uses.

Rahul Sunny answered 2 years ago

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