Next video:
Loading the player...

Price elasticity of demand describes how changes in the cost of a product or service affect a company’s revenue.

For some products, a small change in price will dramatically influence how many units the customer will buy. In other cases, price movements have little effect on demand. Therefore, understanding the price elasticity of each offering is crucial to maximizing profit.

Several factors can affect the price elasticity of products. For example, if substitute goods are readily available, the customer will immediately curtail purchases when the price rises. And if the good represents a major part of the buyer’s total spending, he or she will be more likely to shop based on price.

Understanding how consumers value a product can be vital for any company. Raising prices can be one of the easiest ways to boost profits, but only if consumers are willing to accept the added cost.

  1. No results found.
Related Articles
  1. Insights

    How Demand Changes With a Variation in Price

    What is demand elasticity?
  2. Insights

    What's Demand Elasticity?

    Demand elasticity is the measure of how demand changes as other factors change. Demand elasticity is often referred to as price elasticity of demand because price is most often the factor used ...
  3. Insights

    What Is Elasticity?

    Elasticity measures the relationship between a good and its price based on consumer demand, consumer income, and its available supply. Learn the basics about it here.
  4. Investing

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  5. Insights

    Calculating Income Elasticity of Demand

    Income elasticity of demand is a measure of how consumer demand changes when income changes.
  6. Investing

    Product Demand Elasticity

    Demand elasticity is the ultimate measure of how consumer shopping patterns will change with economic conditions.
  7. Insights

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  8. Insights

    What Does Inferior Good Mean?

    The term “inferior good” does not describe a lack of quality, but rather, is an economic term used when discussing elasticity of demand for a good.
  9. Insights

    What Does Inelastic Mean?

    The supply and demand for an inelastic good or service is not drastically affected when its price changes.
Hot Definitions
  1. Federal Debt

    The total amount of money that the United States federal government owes to creditors. The government's creditors include ...
  2. Passive Management

    A style of management associated with mutual and exchange-traded funds (ETF) where a fund's portfolio mirrors a market index. ...
  3. Series 7

    A general securities registered representative license administered by the Financial Industry Regulatory Authority (FINRA) ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Expatriation Tax

    An expatriation tax is a tax on someone who renounces their citizenship. In the United States, the expatriation tax provisions ...
  6. Earnings Stripping

    Earnings Stripping is a commonly-used tactic by multinationals to escape high domestic taxation by using interest deductions ...
Trading Center