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Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of the quantity of a good or service that is demanded to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. The formula is:

Price elasticity of demand = % change in quantity demanded / % change in price

If the quantity demanded of a good or service decreases significantly in response to a small increase in price, then the demand is said to be price elastic (i.e. responsive to price changes). PED> (-) 1

If the quantity demanded only decreases slightly in response to a large increase in price, then the demand is said to be price inelastic (i.e. not very responsive to price changes). (PED < (-) 1

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