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Economics essay elasticity of demand
Importance of income elasticity of demand
Elasticity of demand essay
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Classification of Demands
Elasticity of demand is an important variation on concept of Law of Demand. Demand can be classified as perfectly elastic, elastic, inelastic, unitary and perfectly inelastic. An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small. An unitary demand is when quantity changes at the same rate as price.
1. Perfectly elastic demand
Perfectly Elastic demands are the demands where the slightest rise in price causes the quantity demanded of a commodity to fall to zero and at the present level of price people demand infinitely large quantity of the commodity. The coefficient of
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A fall in the price of electricity will result in the substantial increase in its demand.
5) Time: The elasticity of demand varies with the length of time. In general, demand is more elastic for longer period of time. For instance, if the price of kerosene rises, it may be difficult to substitute it with cooking gas within a very short time. But if sufficient time is given, people will make adjustments and use firewood or cooking gas instead of kerosene.
Elasticity of Demand
The elasticity of demand is measures the rate of response of quantity demanded due to a various factors, especially Price. In this report we are only considering the Elastic demands and the variable factor which involves money. Based on the assumption, ceteris paribus, there are different elasticity of demand where the responsiveness of quantity demanded is effected by the variation in factors like price, income and price of related goods.
1. Price Elasticity of Demand
The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand (Ep)
Demand can also be 'inelastic'. By inelastic demand we mean that that demand remain constant irrespective of change in price (refer graph below).
The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity (Reem Heakal, 2015). Elasticity differs between products because some products could be more important to the consumer. Products that are necessities will be more insensitive to price changes since buyers would keep on purchasing these products regardless of price increases. Alternatively, a price increase of a good or service which is regarded less of a requirement will discourage more consumers because the opportunity cost of buying the product will become too high.
An example of elastic would be on the pharmaceutical end. Although a physician may prescribe a certain type of medication or treatment, the consumer might seek out a less expensive product or alternative method to reach the goal of what the physician has ordered. Alternative methods could be anything from change in diet, to trying vitamins or supplements, or a change in life style. This is best illustrated in a patient with diabetes. A patient seeks out health care from a physician due to symptoms and is diagnosed with diabetes. The physician wants the patient to start on a regimen of metformin to help reduce blood glucose levels. When the patient goes to the pharmacy to fill the prescription, they find that the cost or copay of the medication is more than they are willing to pay. The patient, in response to the cost, opts to change life style and diet to manage their blood glucose rather than take the advice of the physician and take the medication.
The extent to which demand changes with price is known as "price elasticity of demand" and determined by three major conditions; existence of substitutes, share of budget and time for adjustment (Miller, 422). We can differentiate “price elasticity of demand” into three different categories. They are elastic demand, unit elasticity of demand and inelastic demand. If t...
Elasticity is also prominent to businesses. The price elasticity of demand is very important for companies to determine the price of their products and their total sales and revenue. Newell showed that by cutting the price of the Left 4 Dead game in half to $25 during a Valve promotion, its sales increased by 3000 percent (Irwin, 2009)viii.
Elasticity is the responsiveness of demand or supply to the changes in prices or income. There are various formulas and guidelines to follow when trying to calculate these responses. For instance, when the percentage of change of the quantity demanded is greater then the percentage change in price, the demand is known to be price elastic. On the other hand, if the percentage change in demand is less than then the percentage change in price; Like that of demand, supply works in a similar way. When the percentage change of quantity supplied is greater than the percentage change in price, supply is know to be elastic. When the percentage change of quantity supplied is less then the percentage change in price, then the supply then demand is known to be price inelastic.
Price Elasticity of demand measures the change in the quantity demanded in response to a change in market price of the commodity. The same is measured by following formula:
(a) Ballpoint pens: The price elasticity of demand of ballpoints pens tends to be elastic. Now, what does it mean when an item is elastic? Well, according to the textbook, Microeconomics, written by McConnell, Brue, Flynn, it states,” When price and total revenue move in opposite directions, demand is elastic”(pg. 126, para.1). What this means is that when price goes up, demand goes down and when price goes down, demand goes up. A product like a ballpoint experiences elastic demand because it has many substitutes and has high competition which normally tends to help the consumer because there are many companies who produce the same product and this helps keep the price of the product low.
When demand is elastic as with Coca Cola products price changes affect total revenue. When the price increases revenue decreases and when the price decreases revenue increases. For Coca Cola if they notice a decrease in revenue they would offer products at a discount to increase revenue. They do this quite often with sales such buy 2 20 oz. bottles for $3 instead of the normal $1.89 each price
1. A. Price elasticity of demand is a measure of the degree of responsiveness or sensitive of consumers to a change in price. The first determinant of price elasticity of demand is substituted for the product, which is the more substitutes, the more elastic the demand. Another determinant of price elasticity of demand is the proportion of price relative to income, generally the larger the expenditure relative to one’s budget, the more elastic the
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
The price elasticity of demand helps an organization to determine the price of its products in various circumstances.
The concept of the elasticity is to measure of the responsiveness of the demand and supply of a goods and services to whether the increase or decrease in the price. It is also is a measure of how much the buyers and sellers respond to change in market conditions. Conceptualize of elasticity is to see the response of supply and demand to other economic changes as the elasticity of supply and demand. The elasticity very important because it is help companies to maximize their profit and make decide whether can or not particular market to be profitable. Besides that, companies need to find them to use price elasticity to realities for the marketing reasons. Companies in this situation will probably have the regular and massive sales. For example, shoes shops realize that the market, when consumer are buying the quality product in lower price they feel very happy because they think it’s discounted.
It is affected by factors such as availability of substitutes. In beverage industry, the market is flooded with substitutes. In this case, if Coca Cola increases their prices, the consumers shift to substitutes such as aerated drinks implying that the elasticity of demand is elastic and greater than 1. Time also affects the elasticity of demand of Coca Cola such that if it is long, the consumers will take a long time to shift to substitutes and it will be elastic. However if the change in prices is too short, the elasticity of demand will be inelastic. The elasticity of demand in consumers affects the purchasing power whereby; an increase in price exerts pressure on the consumer’s
There will be no shift in the demand curve, but the quantity demanded will increase due to the decrease in price.