Price Elasticity of Demand: What it Refers To and How It Is Measured

A detailed Summary of Price Elasticity of Demand: What it Refers To and How It Is Measured


Price elasticity of demand refers to the economic condition when any change in price of a good and service generates some kind of response in its demand. When demand is affected by price, we know that quantity demanded is elastic. On the other hand when demand remains constant or change in price produces insignificant change in quantity demanded, we consider it a price inelastic situation. When a firm wants to change the price of a good or service, it needs to take a few things into consideration to find out if quantity demanded would prove to be elastic or inelastic.

Elasticity of demand is measured as:

proportionate change in quantity demanded

Hayes Lemmerz International Inc. is the leading manufacturer of aluminum wheels in the world. While it enjoys 32% market share in North America, right behind its arch-rival Superior that has a market share of 37%, still when seen from a global perspective, Hayes is ahead of Superior in this field. Hayes wants to increase its market share in No


Permanent or Temporary: Hayes must also decide whether it would want to change the price temporarily or for good. This can have a serious impact on quantity demanded. Temporarily, a price change may generate greater elasticity than a permanent price change. For example a one-day promotional price change doesn't produce the same results as permanent price change.

Hayes has a few things going in its favor. For one, it's the second leading supplier of aluminum wheels in North America while it enjoys the position of being Number one in the world. This is a very enviable position to be in. this is because in this situation, it has very few real rivals and thus a price change is less likely to affect demand. Secondly, since people already know how popular Hayes' wheels are, there is a chance they would continue to demand the same quantity if price is increased. However if the firm wants to become a market leader, one good strategy would be to decrease the price just a notch to match or beat the prices at Superior. This will give

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