The Relationship Between The Price Elasticity Of Demand

at total revenue and price elasticity of demand are closely related. (McConnell, Brue, Flynn, 2012)

Price elasticity that relates to demand is determined by many factors. Price elasticity is measured by the change in price and the response from consumer demand. The demand of a good or service will vary the price in the item. The most important factor to determine the price elasticity of demand is necessity. If a good is a necessity, the demand will seldom change and the price is able to be adjusted. The demand is the most important due to the freedom it provides for price adjustment and inventory control. With necessity comes an inelastic price. Other factors such as the

G. Identify by price range the areas on the demand curve where demand is elastic, inelastic, and unit elastic using the attached “Graphs for Elasticity of Demand, Total Revenue.”

When facing an inelastic demand curve, a profit maximizing businessman would always raise price because increase in price will bring about increase in total revenue. On the other hand, when facing an elastic demand curve, he might or might not raise price because increase in price will bring about decrease in total revenue.

Elasticity of demand is a variation in price depending on the demand of a good or service. Items like vehicles, appliances, jewelry, and electronics will sell less at full price than they do when there is a drop in price. When producers and retailers drop the price enough for the market to take notice, people react in deciding to purchase the good or service. This reaction and sensitivity to the market is known as Elastic demand.

This project has three parts, namely Part 1, Part 2, and Part 3. Project Part 1 Introduction: Different economic studies estimate the price elasticity of demand for certain goods, some of which are reported on page 176 of the Hubbard/O’Brien textbook. The following table presents select elasticity of demand estimates from those reported on page 176. Product Barnes & Noble books Coca-Cola Cigarettes Beer Gasoline -4.00 -1.22 -0.25 -0.23 -0.06 Estimated Elasticity

The three goods for which the demand is inelastic is gasoline, electricity and medical procedure. The reason why they are inelastic is because if the prices for these three goods increase significantly the consumers buying behavior is unchanged and the quantity demand is not affected. Furthermore, these good would never go on sale because consumers have fewer options and it a necessity that people can’t live without. I don’t see a reason for putting gasoline for example on sale because if you lower the price of this good nothing will change everything stays the same. I think the relationship between elasticity and total revenue does help me understand why some goods go sale and why others don’t because elasticity looks at the impact of price

As shown on the table above, a 5% increase in price would bring about a decrease in demand at a rate of 16.85%. The table also shows that, at this point, Forrester should keep their price at $4.25 to maximize their revenue, as with an elastic demand and a MR>0 the increase in demand due to a decrease in price will increase Forrester’s revenue.

(b) The same book salesman learned the price elasticity of demand on a particular book is −2. If the salesman cuts the price by 10%, how many percent will increase on the total sales (revenue)? (5%)

It is important to recognize that consumers will buy less of a product as its prices increases. It is also often important to know whether the increase will lead to a large or small reduction in the amount purchased. Economists have designed a tool called the price elasticity of demand to measure the sensitivity of amount purchased in response to a change in price. The equation for the price elasticity of demand is that the percentage of changes in the quantity of a product demanded by the percentage change in the price that caused the changed quantity. The price elasticity of demand indicates how responsive consumers are to a change in a product price (Gwartney).

For instance, if the price, of Coco Cola would increase, the demand for Coco Cola would decrease dramatically, as Coco Cola has close substitutes, such as Pepsi. In addition, the income, of the buyer, also affects the elasticity, of demand. There is an elasticity corresponding to every factor that effects demand.

People and companies make economic decisions on a daily basis by deciding how much of something they will buy and what prices they are willing to pay for the goods or services. Through individual decision-making, consumers determine supply demands for their needs and wants, and companies decide which goods and how many goods are to be sold, and how much to charge consumers. There are many fundamental concepts and definitions that are important to understanding the economics. The concepts that will be discussed in this paper are supply, demand, and price elasticity.

Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more unaffected to price changes because consumers would continue buying these products despite price increases. On the other hand, a price increase of a good or service that is considered less of a necessity will discourage more consumers because the cost of buying the product will become too high.

Price elasticity of demand refers to the way prices change in relationship to the demand, or the way demand changes in relationship to pricing. Price elasticity can also reference the amount of money each

Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies