Assignment 2
Price Elasticity Of Demand
Price Elasticity of Demand is the quantitative measure of consumer behavior whereby there is indication of response of quantity demanded for a product or service to change in price of the good or service ( Mankiw,2007). The Price Elasticity of Demand is calculated using either the point method or the midpoint method.
The Point Method
Price Elasticity of Demand = Percentage change of Quantity Demanded
Percentage change of Price
The Midpoint Method
Price Elasticity of Demand = (Q2 ' Q1) \ [ (Q2 + Q1)/2]
(P2 ' P1) \ [ (P2 + P1)/2]
Were:
Q1= initial Quantity Demanded
Q2 = new Quantity Demanded
P1=Initial Price
P2= new Price
(Source :
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”Higher cigarette prices result in decreased cigarette consumption, but price sensitive smokers may seek lower priced or tax-free cigarette sources, especially if they are readily available. This price avoidance behaviour costs states excise tax money and dampens the health impact of higher cigarette prices” ( Hyland, Bauer, Abrams, Higbee, Peppone and Cummings, 2006). Certain brands that are more expensive are elastic because they are easily substituted by cheaper more affordable ones which remain inelastic because at the end of the day the consumer is satisfied.
The Uses of Price Elasticity When Making Prices Decisions For Producers
Since Price Elasticity shows how a good or service reacts after change in price this is a tool for producers and they utilize this when making pricing decisions. It is crucial that producers know how to maximize their revenue and the price they choose determines this. There is an effect of a change in price on total revenue and expenditure of a product.
When a product is elastic the rise in price leads to the decrease in revenue due to the decrease in quantity demanded being proportionally larger than the increase in price. Therefore producers can make
Price elasticity of demand is a Theory of the relationship between a change in the quantity demanded of a
Elasticity of demand is the relationship between the demands for a product with respect to its price. Generally, when the demand for a product is high, the price of the product decreases. When demand decreases, prices tend to climb. Products that exhibit the characteristics of elasticity of demand are usually cars, appliances and other luxury items. Items such as clothing, medicine and food are considered to be necessities. Essential items usually possess inelasticity of demand. When this occurs prices do not change significantly.
Elastic demand or “elasticity means the extent to which the quantity demanded changes when there’s a change in the price of a good” (Thinkwell, 2013). A product is considered elastic when the change in price increases the percentage change in quantity demanded. When
Elasticity of demand is gauged by the percentage of change in demand when the price of an item varies. If the change in the quantity demanded is greater than 1 the demand is elastic.
Elasticity of demand is measured as the percentage change in quantity demand divided by the percentage change in price .
For example, if the cost to make the paint is $2.75, the profit at $3 would be:
Elasticity are products that have a general fixed price and consumers are not willing to pay anymore than a specific price for that product. This is why when you look at the graph for elasticity the graph shows a horizontal line because if there is a decrease in the demand for a product and an increase in price the line becomes flatter on the graph. There are many elastic products that I buy. For example, gummy bears. I was recently traveling from Florida and I make sure to buy a bag of gummy bears before I go to the airport. I generally expect to pay around $1 for a bag gummy bears at Walgreen's or Walmart. When I get to the airport I try and stay away from buying there food because it is over priced and I am not willing to pay that much.
Elasticity is a measure of the responsiveness of demand to changes in the price of a good or service. In the case of Steam Scot, when the price rises from 4 to 5, demand falls from 60,000 to 40,000 units. The original equilibrium market price of 4 pounds resulted in demand of 60,000 units and this generated revenue of 240,000 pounds. When the prices increased to 5 pounds the resulting demand is 40,000 units, and this generates total revenue of 200,000 pounds. When market price changes from 4 pounds to 5 pounds 40,000 pounds of revenue are lost in this indicates an elastic price elasticity of demand.
Based on the above description, forms of elasticity will affect business decisions and pricing strategies differently depending on the nature and type of products or services being offered. Business organizations whose product offerings have elastic and perfectly elastic price elasticities of demand should not attempt to raise prices of their products because it will cause the quantity demanded and consequently total revenues to drop drastically. Businesses can there use the price elasticities of demand to determine whether the proposed changes in their prices will raise or reduce their total revenue. The following expression may be useful in helping business organizations to determine the impacts of elasticities on their total revenues based on the suggested price changes.
Price elasticity of demand is an economic measure that is used to measure the degree of responsiveness of the quantity demanded of a good to change in its price, when all other influences on buyers remain the same.
Elasticity of demand represented as “Ed” is defined as a “measure of the response of a consumer to a change in price on the quantity demanded of a good” (McConnell, 2012). Determinants for elasticity of demand would include the substitutability of a good, proportion of a consumer 's income spent on a good, the nature of the necessity of a good and the time a purchase is under consideration by the consumer. Furthermore, elasticity of demand is calculated with this formula:
When the price of a good falls, the quantity consumers demand of the good typically rises; if it costs less, consumers buy more. Price elasticity of demand measures the responsiveness of a change in quantity demanded for a good or service to a change in price.
When the price of a good rises the quality demanded falls, if we think about how much does it falls. To figure out by how much it falls we must calculate the price elasticity of demand which is calculate by how responsive demand is to rise in price. Also, the price elasticity of supply measures the responsiveness of quantity supplied to a change in price.
If the demand for the good or services of the company is elastic then the change in quantity demanded would be greater than a change in price. Let’s say the 10 percent decrease in price will cause increase in demand for 20 percent. The effect of this changes is that customers buying more products of this company. They are buying it for lower price but the price decrease outweigh by increasing quantity of the products or services. In this case the company benefits from these changes by raising profits. On the other hand, if company would raise the prices for the product the quantity will decrease so does the profit.
Recall that the elasticity of demand, which measures the responsiveness of demand to price, is given by