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**Price elasticity of demand** measures how much the quantity demanded of a good or service changes in response to a change in its price. It's about how sensitive consumers are to price changes. If demand is **elastic**, a small price change leads to a large change in quantity demanded. If demand is **inelastic**, a price change has little effect on quantity demanded. Several factors influence price elasticity. Availability of substitutes is a big one. If there are many close substitutes, demand is likely to be elastic (people can easily switch to alternatives). The proportion of income spent on the good also matters. If a good takes up a large portion of a person's income, demand tends to be more elastic (people are more price-sensitive). The time horizon is important too. Demand tends to be more elastic over a longer time horizon (people have more time to find alternatives). Understanding price elasticity is crucial for businesses when making pricing decisions. If demand is elastic, they need to be very careful about raising prices. If demand is inelastic, they have more flexibility in setting prices. Also, for governments, if they tax the goods that are inelastic, it generates more revenue than taxing goods that are elastic. It is used to generate more revenue.
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