CHAPTER 3

Understanding the Price Sensitivity of Buyers

The law of demand asserts that as the price of a good rises, the quantity demanded decreases and vice versa. Another key element of demand theory that is critical to price-setting is the price elasticity of demand. The price elasticity of demand refers to the responsiveness of the quantity demanded to price changes. Drivers inevitably grumble about rising gasoline prices, and for good reason. Many individuals regard driving as a necessity because they simply live too far from work, school, or other valued destinations to walk or ride a bike. Moreover, their cars only run on gas: They can’t pump lemonade into their tanks if the price of gas becomes too costly. But consumers are less likely ...

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