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Elasticity - Research Paper Example

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ELASTICITY OF DEMAND Abstract The sales of a product depend upon the demand for the product. There are several factors which influence the demand for the products. Price being the primary determinant, other factors includes disposable income level of the buyers for the particular product, prices of the substitute products and future trends in prices and changes in tastes and preferences of the consumers…
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Download file to see previous pages... Most of the strategies are designed to overcome the ‘elasticity’ factor. Availability of credit being the important element in the scheme, the seller’s ability to arrange finance for the consumers to buy their product plays an important role with the highly developed financial services sector to-day. Exchange rates and interest rates are the important considerations while buying on credit. The supply side constraints on account of events such as monsoon failure, industrial unrest and natural disasters and the regulation of supply through collusion under monopolistic conditions vitiate the market conditions. The pharmaceutical companies taking advantage of the protection given under patents fix the prices at exorbitant levels for their products, the demand for which are inelastic in nature. This paper seeks to analyze elasticity of demand from a comprehensive perspective. Key words: Elasticity, Demand, Price, Branding & Marketing. ELASTICITY OF DEMAND Price Elasticity of Demand Law of demand states that other things being equal, the quantity demanded extends with a fall in price and contracts with a rise in price. (Mandal, 2007, p. 73) Under the dynamic market conditions, there are several factors which may influence the demand irrespective of change in price. Apart from the accepted exceptions such as prestige goods consumed by rich people which forms the basis for conspicuous consumption and speculative goods like shares where the demand will be more when the prices rise and demand for hoarding purposes due to scarcity or hyper inflation, technically the law of demand does not apply to necessaries of life where the demand is said to be inelastic. Robert Giffen discovery could be the real exception in this case. He found that poor people will demand more of inferior goods if their prices rise. They reduce their expenditure on superior goods to conserve their little income to spend more on inferior goods. The quantum of change is explained by elasticity of demand or rate of change. The ratio of a relative change in quantity to a relative change in price is called as elasticity. Mankiw states that economists compute the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in price. That is, Percentage change in quantity demanded Price elasticity of demand = ----------------------------------------------------- Percentage change in price (2012, p.91) The concept of price elasticity of demand is the primary force behind the innovations that we have witnessed during the last few decades. For instance, rising cost of fuel has forced the car companies to manufacture fuel efficient cars. The rise in fuel cost has been compensated by the increased mileage provided by the cars. (Annexure I) Hughes, Knittel, & Sperling concluded in their study that “results suggest that technologies and policies for improving vehicle fuel economy may be increasingly important in reducing U.S. gasoline consumption." (2006)The same concept leads the car manufacturers to concentrate their attention on electric cars. The depleting natural resources and their increasing cost make the industrialists to concentrate on alternative renewable energy sources. The price elasticit ...Download file to see next pagesRead More
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