What is the definition of price elasticity of demand? Explain the relationship between price elasticity and total revenue? How does price elasticity of demand affect a firm's pricing decisions? How does the availability of substitutes affect price elasticity of demand? Provide examples to support your answers.
Price elasticity of demand (PED) is an elasticity that measures the responsiveness of the quantity demanded of a good to its price. The elasticity of the portion of the demand curve facing a firm determines how its revenue will change in response to changes in price. Elasticities of demand with an absolute value greater than 1.0 are "elastic", and a decrease in price will be outweighed by the greater quantity of goods sold, causing revenue to increase. Elasticities of demand with an absolute value less than 1.0 are "inelastic", and the decrease in price will not be made up for by the greater quantity of goods sold, causing revenue to decrease.
Here Ed= %change in demand/ ...
This solution discusses price elasticity of demand in 447 words with formula and examples of calculations.