The aim of the paper “Price Elasticity of Demand” is to analyze price elasticity of demand, which refers to how sensitive the amount of a good or service responds to changes in prices. A good or service with many close substitutes will have its demand being more elastic…
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For example, if the price of fuel increase by 20%, the reaction would be that the demand for new Vehicles that are fuel inefficient will reduce by 40% and therefore cross elasticity of demand will Be -2 (-) cross elasticity represents two commodities that are complementary, while (+) cross elasticity represent two substitute commodities. In above example, the two commodities, fuel and vehicle are complements to mean that one commodity is used by the other. In such a case, cross elasticity of demand is (-) as evidenced by a reduction in demand for vehicles when fuel price is raised. Everybody needs salt in food and nothing else can substitute salt. Therefore, when the price of salt goes high, then more is spent on it. Also, the same case would be for people who want to build stronger and permanent stone buildings. They must need cement and therefore if the price of cement increases, more will be spent on it rather than thinking of adjusting to another product. Two commodities are substitutes when the cross elasticity of demand is (+) to mean that when the price of one commodity increases, the demands of the other commodities rise. For instance, if the company that makes Rhino matches increase their prices significantly, then the customers are most likely to adjust to other types of matches rather than paying more for the same Rhino match at an increased price. The same would apply if the Sony Company that manufactures electronics increases the prices of their products, customers will opt for similar products manufactured by different companies and which are sold at a fair price. This is because the other companies can produce substitutes that meet the customers’ demands. Elasticity determinants: the availability of substitutes, substitutability, and time has to be put into consideration because even with the increase in prices and the customers turning to substitutes, every business will continue running. Hence, for the commodities with many substitutes, the merchant will have to create special offers from time to time to attract the customers unlike the commodities with inelastic demand. Then some products like salt signify a minute portion of the customer’s financial plan resulting in reduced concentration being given to its price. Also if a commodity is the only option in the market, then its substitutability becomes very minimal. e.g roller skates. If they are the only skating gadgets then the customers will not be very perceptive to its price variations since, after all, they require them for skating.
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(Price Elasticity of Demand Coursework Example | Topics and Well Written Essays - 1750 Words)
“Price Elasticity of Demand Coursework Example | Topics and Well Written Essays - 1750 Words”, n.d. https://studentshare.org/business/1392127-price-elasticity-of-demand-refers-to-how-sensitive-the-amount-of-a-goodor-service.
These factors may include the consumers, and the market competition among other factors. Considering the price strategy that is demand based, the market would always set out a price for a commodity after researching the desires of consumers and verifying the price range which is acceptable to the market target.
Individuals would not buy the product as they used to and the quantity demanded will fall whilst the firms would supply more of the product i.e. the supply curve will move to the right. In the case above, if the demand for corn increases, there would be a shift in the demand curve to the right.
If the demand for corn increases due to its use as an alternative energy source, there will be a decrease in the supply of corn's substitute such as soybean. This is because change in the price of related goods is a determinant of demand (McConnell & Brue, 2002).
This report is divided into two sections; the first section of the report discusses important terminologies such as Price elasticity of demand, Cross elasticity of demand, Income elasticity of demand and Price elasticity of supply. The other section of the report discusses about the actions that the government can take in order to reduce the fluctuations of commodity prices.
The consideration which we pay for a product at a certain quantity is called the price of the product. When we talk of the product price, we mean market price. That is the price at which the product is sold to all buyers in the market. The quantity of a product that we purchase at a certain price is called the demand of the product.
Price elasticity of demand can be defined as “a measure of responsiveness or sensitivity of consumers to price change”. With some products, consumers have a higher responsiveness to price changes. These products are said to have a relatively elastic demand. On the other hand, some products have a low responsive to price changes.
(For example going from 7 to 10 is a 30% change while going from 10 to 7 is a 42.86% change).
When elasticity is equal to one it is called unit elasticity and the change in quantity demanded causes a proportionate change in price. So a price change in either direction will not yield a change in revenue.
A certain good in the market can obtain several forms of demand elasticity - elastic, inelastic, and unitary elastic. A product that is elastic obtains a condition wherein the percentage change in the quantity demanded is greater than the percentage change in price.
The easier it is to swap, the more elastic the demand of such a product is (Mankiw 90).
Type of want is satisfied by product; if the product satisfies basic needs or necessities such as medical care, basic food stuff and housing, then the price elasticity of such
One of the major concepts of microeconomics is price elasticity of demand, which refers to sensitivity levels of demand for a given product or service to changes in its price. The elasticity of demand co-efficiency is the percentage change in the quantity of a product or frequency of a service in reference to percentage variation in price.
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