Question

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Demand of a product is usually very sensitive to economic variables, such as the prices and consumer income. This responsiveness of demand is elasticity.

Explain Price elasticity with appropriate formulae, and also 3 factors affecting demand.

Answer 1

Price elasticity of demand refers to the degree of responsiveness of change in quantity demanded of a good to change in its price. It shows how demand for a good changes as price changes.

Formula:

Price elasticity of demand = % change in QD/%change in P

Three factors which affect demand for a good are:

• Change in consumer income
• Change in price of relative goods
• Change in consumer tastes and preferences

These are the 3 major factors which affect demand for a good.