Explain the concept of Price Elasticity of Demand and discuss its relevance for Business and Government
Price elasticity of demand
According to the law of demand: the lower the price the more product is bought. But consumer response to changes in price can vary significantly from product to product.
Economists measure the response (sensitivity) of consumers to changes in product prices, using the concept of price elasticity.The gist of the concept of price elasticity is:• if small changes in price leading to significant changes in the quantity bought products, demand for such products are commonly called elastic;• if a substantial change in price leads to only a small change in the amount of purchases, In these cases the demand is inelastic.The extent price elasticity or inelasticity of demand is measured by economists with Ed coefficient calculated by the following formula:
The same formula can be written as:
Proceeding from the formula, the demand is elastic, if the percentage change in price leads to a greater percentage change in the amount of products that is asked. For example, if a price reduction of 2% causes an increase in demand of 4%, demand is elastic. When demand is elastic, the elasticity is greater than unity. If the percentage change in price is accompanied by a relatively smaller change in the number of products that is asked, then demand is inelastic. If the price reduction of 3% resulting in a growing number of products Asked by just 1%, demand is inelastic. The coefficient of elasticity in this case, less than one and reach 1/3. When demand is inelastic, the elasticity is always less than unity. Between elastic and inelastic demand appears border situation, when the percentage change in price and then the percentage changes in quantity of products that is asked are equal in magnitude. If prices fall by 1% causes an increase in sales by…...