Price Elasticity: An Analysis Of Price Elasticity

According to McConnell, Brue, and Flynn (2015), elasticity is an important concept that helps answer many economic and business questions (p. 135). It increases the understanding of consumer markets by explaining to some degree how changes in price and income affect supply and demand. In addition, elasticity allows supply and demand to be analyzed with greater accuracy. Businesses use elasticity to decide how to price products and services which helps them to be more competitive. The information that is gathered about how consumers respond to prices can also help to reduce uncertainty and risk. Price elasticity measures how sensitive a thing is in relation to price. The following is a brief examination of price elasticity of supply and demand.

He contends that the law of demand is the most famous in economics and is also the truest law for many economists. One of the reasons for this belief is that elasticities allow economists to quantify differences among markets without standardizing the units of measurement (Aycock, 2010). The law of demand explains that, other things equal, when the price of a good rises, the quantity demanded will fall and when the price of a good falls, the quantity demanded will rise. In terms of elasticity, the price elasticity of demand (PED) measures how sensitive consumers are to a change in price (McConnell et al., 2015, p.134). Prices are elastic when a change in price causes a larger percentage change in quantity demanded. For example, if the price of a Snickers bar falls 20% but demand increases by 80%, PED = -4.0. This change in price may prompt consumers to buy alternative candy bars. Inelastic price changes causes a smaller percentage change in quantity demanded. If the price of tobacco falls 30% but demand only increases by 10%, PED = -0.33. Since it is so addictive and does not have a substitute, if the price of cigarettes increases people who smoke will likely continue to do so (Pettinger,