# Price Elasticity of Demand (25 Marks)

Submitted By cbarnett
Words 671
Pages 3
“Evaluate the view that the ability of firms to exploit their customers depends on the price elasticity of demand for their products" 25 marks Callum Barnett

Price elasticity of demand is the proportionate change in demand for a good, following an initial proportionate change in the good’s own price. Most goods are either elastic or inelastic. Elastic demand means that consumers are really sensitive to price changes. If the price goes down just a little, they'll buy a lot more. If prices rise just a bit, they'll stop buying as much and wait for prices to return to normal. Inelastic demand is demand for a good or service that does not increase or decrease in response to changes in price. Demand for goods that are life necessities, such as water, or economic necessities, such as fuel, tends to be inelastic, since people cannot greatly change how much of these goods they consume, even if the price changes dramatically.
So when demand is elastic firms can’t exploit consumers as much as they are very sensitive to price, so if there is a slight increase in price in the product then demand will fall more significantly than the price rise meaning the firms would lose more customers and profits due to the decrease in demand as this diagram shows: http://www.darwinsmoney.com/wp-content/uploads/2011/01/elasticity-of-demand-300x225.jpgSo as you can see, let’s say a price of a good has increased from 18 to 20 that is an increase of just over 11%. Before this increase they were selling 20 of this good at the price of 18 but this 11% increase lead to a 50% reduction in quantity from 20 to 10, which is a significant drop compared to the small rise in price. This shows that it would be very hard to exploit consumers on an elastic good as you would have to reduce the price if you want to increase sales but that might reduce your total revenue as you’re selling at a lower…...

### Similar Documents

#### I. the Importance of Price Elasticity of Demand and Cross Elasticity of Demand

...importance of Price elasticity of demand and Cross elasticity of demand 1. Price elasticity of demand (Ed) used to generate the revenue. It shows the percentage change in quantity demanded in response to a one percent change in price. The biggẻ the number, the more people’s respond to the price. Interpreting values of price elasticity coefficients Perfectly inelastic demand[10] Perfectly elastic demand[10] Elasticities of demand are interpreted as follows:[10] Value | Descriptive Terms | | Perfectly inelastic demand | | Inelastic or relatively inelastic demand | | Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand | | Elastic or relatively elastic demand | | Perfectly elastic demand | Effect on total revenue Generally any change in price will have two effects * The price effect: for inelastic goods, an increase in unit price will tend to increase revenue and vice versa. * The quantity effect: an increase in unit price will tend to lead to fewer units sold and vice versa. The relationship between PED and total revenue: * When Ed = 0, changes in the price do not affect the quantity demanded for the good; price increase will raise the total revenue. * When -1 < Ed < 0, the percentage change in quantity demanded is smaller than that in......

Words: 777 - Pages: 4

#### Supply and Demand and Price Elasticity Paper

...Supply and Demand and Price Elasticity Paper Betty Hargrove ECO/212 January 30, 2013 Vivek Singhal Introduction After careful evaluation of our daily commodities we have chosen, soap, oil, sugar, salt, tissue, flour, toothpaste, deodorant, electricity, and wheat. These lists of commodities are necessary in a basic style of life. Our chosen product to focus on throughout our paper is sugar. We will address the supply and demand shift of sugar in a market economy. Furthermore, we will address supply and demand and price elasticity as well as whether our chosen commodity is a necessity or a luxury. Supply and Demand Shift There are limited explanations of why the demand and shifts in sugar vary. One of these reasons is because of the federal tariffs that are put on sugar. A tariff or tax on the import or even export increases the price and make it less in demand. No one wants to pay more for anything that we were paying less for a week ago. Also now there are a few different substitutes of sugar then using the real things. There are brands such as Equal, Splenda, and Sweet and Low. These are known as artificial sugar substitutes. These artificial sugar substitutes are sometimes found in food that we consume daily depending on our likes. Items that are, labeled as “diet” or “sugar free” use artificial sweeteners. There is “sugar free gum” and “diet soda”. These products typically have artificial sweeteners. The demand for the sugar is how much the consumers are......

Words: 2096 - Pages: 9

#### Price Elasticity of Demand

...Price elasticity of demand is the measurement of how responsive a good or service is demanded based on a percentage change in price. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in the price of the good or service. There are many factors that the price elasticity of demand that are considered such as ranges, determinants and relationships with revenue. Price elasticity of demand has three ranges when determined. The first is elastic demand. Elastic demand occurs when the price elasticity demand is greater than one. It occurs when a change in price of one percent causes one percent change in quantity demanded. Another range of elasticity is unit elasticity of demand. It occurs when a change of one percent causes exactly one percent to change in quantity demanded. A third range is inelastic demand. It is the opposite of elastic demand. It occurs when a change of a price of one percent is less than one percent in the quantity demanded (Miller, 2013). There three main determinants of price elasticity of demand. One determinant is the existence, number, and quantity of substitutes. The closer the substitutes for a certain product or service exist as well as the amount, the greater the price of the elasticity demanded will be. The second determinant is the percentage of a consumer’s total budget devoted to purchase the commodity. The greater the share of a person’s budget spent of a product or service, the greater the......

Words: 422 - Pages: 2

#### Elasticity of Demand, Cross Price Elasticity and Income Elasticity

...A. 1. Elasticity of demand: According to McConnell, Elasticity of demand is the degree to which changes in prices and incomes affect the supply and demand,” (p 76). In other words elasticity tells us how much a price change effects sales or demand of a product. Elasticity can be measured and referred to as: elastic, unit elastic or inelastic. Elasticity of demand is measured: Ed=percentage change in quantity demanded of productpercentage change in price of product If the result is a coefficient greater than one the product price is elastic, if the result is equal to one it is considered unit elastic, and if the coefficient is less than one it is inelastic. 2. Cross-price elasticity: Cross-price elasticity refers to the elasticity of a product when there is a substitute, or compliment product to be considered. According to McConnell, (2012) “The cross elasticity of demand measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y). “ A substitute product is a product that can be used in place of the original product, at the consumer’s discretion. A compliment is a separate product that is generally purchased to be used with the original product, like peanut butter and jelly. E xy =percentage change in quantity demanded of product xpercentage change in price of product y If the coefficient results are more than zero, the product is considered a substitute product. If the......

Words: 1872 - Pages: 8

#### Price Elasticity and Demand Varies

...consumers increase the quantity demanded at a given price, it is referred to as an increase in demand. Increased demand can be represented on the graph as the curve being shifted to the right. At each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2. In the diagram, this raises the equilibrium price from P1 to the higher P2. This raises the equilibrium quantity from Q1 to the higher Q2. A movement along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand," that is, a shift of the curve. In the example below, there has been an increase in demand which has caused an increase in (equilibrium) quantity. The increase in demand could also come from changing tastes and fashions, incomes, price changes in complementary and substitute goods, market expectations, and number of buyers. This would cause the entire demand curve to shift changing the equilibrium price and quantity. Note in the diagram that the shift of the demand curve, by causing a new equilibrium price to emerge, resulted in movement along the supply curve from the point (Q1, P1) to the point Q2, P2). If the demand decreases, then the opposite happens: a shift of the curve to the left. If the demand starts at D2, and decreases to D1, the equilibrium price will decrease, and the equilibrium quantity will also decrease. The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the......

Words: 496 - Pages: 2

#### Price Elasticity of Demand (Elastic and Inelastic)

...2. | Price elasticity of demand | Electricity | 0.12 | Foreign Travel | 1.5 | Jewelry | 2.9 | Based on the table above, explain the Price Elasticity of Demand value of the THREE goods and services and of what use is this information to business managers whose firms sell these products or services. Answers: d Price Quantity The price elasticity of demand measures the responsiveness of the quantity demanded to changes in the price. When the price elasticity of demand of a product is inelastic (Ped < 1), a change in price will bring about a proportionately smaller change in the quantity demanded. When there is an increase in price, it will result to a proportionately smaller decrease in the quantity demanded. Electricity is an essential good. Therefore, it has an inelastic demand of 0.12. With the information known that demand for electricity is relatively inelastic, business managers whose firms produce electricity will now imply an increase in the price to increase their total revenue. Total revenue can be calculated by the quantity of sales multiplied by the price per sale. When the business managers increase the price of electricity services, it will only result in a small decrease in the quantity demanded. Therefore, business managers will increase the price of electricity to obtain a greater amount of revenue. Price d Quantity When the price elasticity of demand of a product is elastic (Ped > 1), then a change in price of a product......

Words: 513 - Pages: 3

#### Price Elasticity of Demand of Sugar

...| Page | | Table of Content | | 1.0 | Introduction……………………………………………………............................. | 1 | 2.0 | Price Elasticity of Demand for Sugar2.1 Availability of Close Substitutes……………………………………………….2.2 Length of Time Involved…...…………………………………………….........2.3 Necessities versus luxuries……………………………………………………..2.4 Definition of market……………………………………………………….......2.5 Share of sugar in the consumers’ budget…………………………………....... | 2 – 345 – 67 – 89 – 10 | 3.0 | Conclusion……………………………………………………………………….... | 11 | 4.0 | Bibliography……………………………………………………………………..... | 12 | | Appendix…………………………………………………………………............... | 13 | Table of Figures Figure | Page | Figure 1: Availability of close substitutes for sugar…………………………………. | 3 | Figure 2: Differences of long run and short run for price hike in sugar…………….. | 4 | Figure 3: Differences between necessity goods (sugar) and luxury goods (honey)…. | 6 | Figure 4: Differences between narrow market and broad market……………………. | 8 | Figure 5: Differences between middle-income and low-income consumers with high-income consumers……………………………………………………………… | 10 | 1.0 Introduction According to the article that was chosen, the Price Elasticity of Demand for Sugar in Malaysia is focused. The group members interpreted and analysed the article based on the core microeconomic concept of Elasticity. The analysed article is attached in the Appendix. The article is mainly regarding the issue of decreasing the subsidy...

Words: 1885 - Pages: 8

#### What Are the Major Determinants of Price Elasticity of Demand

...Page 90 3. What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest toothpaste; (d) ketchup; (e) diamond bracelets; (f) Microsoft Windows operating system. ---Substitutability, proportion of income; luxury versus necessity, and time. Elastic: (a), (c), (e). Inelastic: (b), (d), and (f). 5. Calculate total-revenue data from the demand schedule in question 2. Graph total revenue below your demand curve. Generalize about the relationship between price elasticity and total revenue. --- Total revenue data, top to bottom: \$5; \$8; \$9; \$8; \$5. When demand is elastic, price and total revenue move in the opposite direction. When demand is inelastic, price and total revenue move in the same direction. Page 113 4. What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free-rider problem as it relates to public goods? Is U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain. Public goods are nonrival (one person’s consumption does not prevent consumption by another) and nonexcludable (once the goods are produced nobody—including free riders—can be excluded from the goods’ benefits). If goods are nonrival, there is less incentive for......

Words: 554 - Pages: 3

#### Ped Price Elasticity for Demands

...QUESTION: price elasticity of demand for textbooks is two and the price of the textbook is increased by 10%. By how much does the quantity demand fall? Inter the result and discuss reasons for the fall in the quantity demand. Price elasticity of demand (PED) is defined as the responsiveness of the quantity demanded of a good or service to a change in its price. Price Elasticity of Demand Percentage Change in Quantity Demand Percentage Change in Price for Product A So, Percentage Change in Quantity Demand for Product A = PED X Percentage Change in Price for Product A Given PED of Books= 2, Percentage Change in Price for Books = 10% So, Percentage Change in Demand for Books = 2 X 10% = 20% Therefore the fall in the Quantity Demand of the Books will be 20% Price elasticity of demand Therefore, it is percentage change in quantity demanded by the percentage change in price of the same goods. In economics and business studies, the price elasticity of demand is a measure of the sensitivity of quantity demanded to changes in price. It is measured as elasticity, which it measures the relationship as the ratio of percentage changes between quantities demanded of a good and changes in its price. In other words, demand for a product can be said to be very inelastic if consumers are insensitive to the price and is willing to pay for the product at any price, and very elastic is when consumers are more price sensitive and will only pay a certain......

Words: 676 - Pages: 3

#### Price Elasticity of Demand

...Assignment: Show that Price Elasticity of demand (Ep) changes from 0 to -∞ as we move along the linear demand curve. Solution: Demand Curve: Relationship between the quantities of a good that consumers are willing to buy and the price of the good. Linear Demand Curve: Demand Curve that is a straight line. In mathematical form, it can be defined as Q = a – bP Where Q = Quantity demanded; P = Price per unit of the good; and a, b = constants Elastic range Price Ep = -∞ (PerfectlyElastic) Q = a- bP . Ep = -1(Unitory elastic) Inelastic range Ep = 0 (Perfectly inelastic) Quantity Price Elasticity of Demand: Percentage change in quantity demanded of a good as a result from a 1- percent increase in its price. In mathematical form, it can be defined as Ep = ΔQ/Q = (P/Q) (ΔQ/ΔP) …………..(1) ΔP/P Where Q, P = same as above ΔQ = Change in quantity demanded ΔP = Change in Price per unit of the good Consider the Linear demand curve Q = a-bP Differentiating the above equation w.r.t. price, we have change in quantity w.r.t change in price ΔQ/ΔP = -b …………….(2) Substituting (2) in equation (1), we have, Ep = (P/Q) (-b) = (-Pb)/Q …………………..(3) From Equation (3), when P ...

Words: 381 - Pages: 2

#### Price Elasticity and Supply & Demand

...Price Elasticity and Supply & Demand Fill in the matrix below and describe how changes in price or quantity of the goods and services affect either supply or demand and the equilibrium price. Use the graphs from your book and the Tomlinson video tutorials as a tool to help you answer questions about the changes in price and quantity Event Market affected by event Shift in supply, demand, or both. Explain your answer. Change in equilibrium Frozen orange crops in California Orange juice Supply (left)—Not as many available oranges to offer consumers. Price will increase and quantity will decrease. Hurricanes in the Gulf Coast Oil and seafood Supply (left)—Not as much oil or seafood available to offer consumers. Price will increase and quantity will decrease. Cost of cotton decreases Clothing Supply (right) – More clothing available to offer consumers. Price will decrease and quantity will increase. Technology improves efficiency in pasta manufacturing Pasta or pasta related products (supermarket foods, restaurant foods) Supply (right) – More pasta or pasta related products available to offer consumers. Price will decrease and quantity will increase. 1. What do substitutes refer to in economics? Give an example of two substitutes. A substitute refers to an alternate good that consumers are able to purchase when the original good had a price increase. Examples of substitutes are when consumers buy margarine when the price of butter increases or buy miracle whip when the...

Words: 311 - Pages: 2

#### Price Elasticity of Demand

...Price elasticity of demand From Wikipedia, the free encyclopedia Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. Contents [hide]  * 1......

Words: 3410 - Pages: 14

#### Supply, Demand and Price Elasticity

...tall, hierarchical, decentralized organization. Belonging to the Navy causes it to follow the “Chain of Command” concept, where all of the major decisions are made at the top, then filter down to the different commands. However, it is decentralized because there is Executive Leadership at each command that makes decisions that affect them individually. South West Regional Maintenance Center runs as a functional organization. This organization tends to be customer-based, and as organic as possible. Monetary Resources Monetary resources are critical in any organization. Although this organization is an entity of the government, money is as vital as ever. Using the MSMO vehicle allows the organization to provide more work, at a competitive price. NASSCO has been awarded the contract to be the prime contractor to SWRMC, with multiple sub-contractors to support the work load. However, without the monetary resources, this option would fail to exist. Another aspect of money is salaries. Salaries pay people’s living, and can either make employees very happy, or very unhappy. Importance falls on keeping employees happy. Happy employees are productive employees. Knowing how to manage finances is a key role in the success of a business. Working for the military makes it quite difficult to manage budgets. As the years of the recession and war are going by, all aspects of the military are expected to do more with less. Innovative ways of managing the budget are coming about all the......

Words: 938 - Pages: 4

#### Price Elasticity of Demand

...situations, business managers raise or lower price as they judge in their best interest. Elasticity of demand is a quantitative way to measure consumers’ sensitivity or responsiveness to price changes. Starting from the current price a firm charge, elasticity of demand is measured by the percentage change in quantity demanded in response to a percentage change in price. If, for example, price is raised by 10 percent and quantity demanded decreases by 10 percent (the law of demand states the higher the price the lower the quantity demanded and vice versa), the increase in revenue from the higher price is exactly offset by the decrease in quantity demanded. Total revenue for the firm will remain the same, though profits may increase because the firm is now selling less quantity of their product and receiving the same amount of revenue. When a price change results in no change in total revenue, the elasticity-of-demand coefficient is one or unitary.  The role of price change influences to a greater extent in the demand for these substitutes and compliments. This suggests that the elasticity of demand also is significant when considering compliments and substitutes that also play a role in the market trends. According to the (Travel Agents: Executive Summary-UK-December 2011) initially all the travel agency kept their prices constant and carried on as if nothing has happened. The report emphasizes on the decline of overseas holiday booked since the price of the holidays didn’t......

Words: 1597 - Pages: 7