Explain price elasticity of demand and how firms can exploit this.
Price elasticity of demand (PED) is defined as % change in quantity demanded / % change in price. This is also the slope of the demand curve. If PED is less than 1, we say that the demand for the good is inelastic (i.e. changes in price have minimal effect on demand), if PED is greater than 1, demand is elastic (i.e. a change in price greatly influences the change in demand), and if PED = 1, it is unitary elastic and the changes are proportionate.Price elasticity is especially important for monopolies as they can charge a higher price and supply lower quantity if demand is price elastic. Consumers will still demand the good even at a higher price.
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