Price/income Elasticity of Demand

In the ever-changing economy, staying competitive and increasing revenue is a constant battle. Understanding the economics is a main key in remaining or becoming successful in the market. Many tools aid in making economic decisions such as whether to increase or decrease price and understanding income versus demand. The following information will provide insight on using the price elasticity of demand to determine whether to increase or decrease price and using the concept of income elasticity of demand to determine demand expectations.

The price elasticity of demand “measures the rate of response of quantity demanded due to a price change” (About.com, 2008). Several factors influence the price elasticity of demand including

• Availability of substitutes

• Degree of necessity of luxury

• Proportion of income required by the item

• Time/period considered

• Permanent or temporary price changes

• Price points.

The price elasticity of demand is a unit-less number calculated by dividing the proportionate change in quantity demanded by the proportionate change in price. So how can this number be used to decide whether to increase or decrease price