Price Elasticity

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Price Elasticity (PE) is a concept that describes how products within a given product class behave in relation to demand. Price elasticity of supply measures the relation between a change in supply of a product and the percentage change in overall demand of that same item. It is measured by dividing the rate of change of total demand by the rate of change of total sales. For instance, if the price of an item increases 20%, then consumer demand for that item goes up accordingly...and vice versa. But if the price decreases, then consumer demand goes down and so does the price/sale ratio.

The relationship between demand elasticity and price elasticity (or their zero mean) is called the demand-supply relationship. This is true for most goods and services with some exceptions. In the case of most goods and services, demand and supply always equal. Thus when the prices are set at their theoretical value on the supply side and the quantity demanded on the demand side, then the equilibrium price is a point on the demand curve at which demand and supply reach exactly zero.

The term price elasticity was first used by Henry Fayol in 1947 to define the relationship between the price change of one good and its relative supply in a closed economy. Since then it has been used to describe the relationship between the price change of one commodity in relation to its relative supply in an open economy. Supply elasticity and demand elasticity are closely related but not equal. In other words, supply elasticity is a measure of how flexible the market is for the asset while demand elasticity is the measurement of how flexible the market is for the commodity in question.

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