Question
What is meant by price elasticity of demand? Briefly explain the determinants of price elasticity of demand.
Answer :
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Price elasticity of demand refers to the degree of responsiveness of the quantity demanded of a commodity to a change in its price, while other factors remain constant. It shows how much the demand for a product changes when its price changes. If a small change in price causes a large change in quantity demanded, demand is said to be highly elastic. If quantity demanded changes only slightly despite a change in price, demand is relatively inelastic. Price elasticity of demand can be expressed as: **Price Elasticity of Demand (Ep) = Percentage Change in Quantity Demanded ÷ Percentage Change in Price** For example, if a 10% increase in the price of a commodity results in a 20% decrease in its quantity demanded, the price elasticity is 2. This indicates relatively elastic demand. The main determinants of price elasticity of demand are as follows: 1. **Availability of Substitutes:** The availability of close substitutes is an important determinant. If a product has many substitutes, consumers can easily shift to other products when
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