Demand Elasticity

Abstract The price elasticity of demand is a well‐established concept with many implications for pricing strategy. This concept together with the interrelated concepts of cross‐price elasticity and income elasticity of demand is covered. First, the price elasticity is defined and several illustrative examples of the same are provided. This is followed by a discussion on the economic theory relating elasticity and optimal pricing in monopoly and competitive markets. Recent empirical findings regarding the determinants of pricing are mentioned. Next, the topic of cross‐price elasticity of demand is introduced and its application to market structure analysis is presented. The article concludes by relating income elasticity to the remaining elasticities.