What Is Price Elasticity Of Demand?
Economically speaking, that relationship is termed price elasticity of demand. Price elasticity of demand is the percentage change in quantity of a product demanded divided by the percentage change in the price that caused the change in quantity. It indicates how responsive consumers are to a change in a product’s price. For example, when gas prices rise, there is normally a drop in the amount of petroleum sold by gas stations. Not only is the amount of gas purchased affected, but where gas is purchased is also affected. People have a tendency to “shop around” for the cheapest gas especially when gas is over $3. Gas prices also affect the sale of vehicles on car lots as well. Price elasticity essentially causes a domino effect from affecting gas purchases, to changes in the amount of gas purchased store by store, to a decline in the number of vehicles purchased from car dealerships. This further supports the law of demand which states that an increase in a product’s price causes a decrease in purchases and a price decrease results in sales increases. So figuratively speaking, people live for price