Download file to see previous pages...
The function of responsiveness of a particular variable to the change in parameters of the other variables is what elasticity is all about. The frequently used dimensions of elasticity include price elasticity of demand, price elasticity of supply, income elasticity of demand and elasticity of substitution between factors of production. Because of the immense contribution that the concept of elasticity has made to the study of responsiveness of price and other factors to changes in demand and supply, it has indeed made a significant contribution to the understanding of the market and agents in its. This is the topic for this paper and the subsequent paragraphs discuss the concept in detail along with the example of a supermarket to elucidate the concept.
If we take the first dimension or the PED (Price Elasticity of Demand), this is the percentage change in the quantity demanded for a drop or rise in price and hence measures how “elastic” the demand is to a change in the price of the good. The measurement of PED is by dividing the percentage change in the quantity demanded by the percentage change in the price and since either the percentage change in demand or the percentage change in price is negative, the PED is always negative. Hence, the PED is usually expressed in terms of absolute values. Goods that have a PED of more than 1 are supposed to be highly elastic meaning that changes in price have a large effect on the change in demand. On the other hand, goods that have a PED less than 1 or between 0 and 1 are supposed to be inelastic or relatively inelastic. This is because the change in demand is not that much greater for a change in price (Ayers & Collins, 2003). If we apply this dimension to the case of the supermarket, we find that goods like alcoholic beverages and luxury products like perfumes and cosmetics are highly elastic since a drop in the price invariably leads to
...Download file to see next pagesRead More
Think about whether farmers will use their soybean farms to produce more or less corn. Explain, in economic terms [e.g. supply determinants], why this is so. When the price of corn increase as a result of its being used as an alternative energy source, the supply of corn substitutes like soybeans will decrease.
The supply side constraints may push up the prices. Similarly elasticity of demand for the product acts as a limiting factor to sales. However, in real life situations, the elasticity of demand is governed by diverse factors such as branding, cross selling, value addition, creating new uses for the products, multi-level marketing, direct marketing, discount sales and online marketing.
Simply put, it is a unit-free measure. Price elasticity of demand is an integral part in pricing of goods when conducting business. In effect, the price elasticity of demand is a distinct demand curve. The demand curves are grouped on the basis of the size of price elasticity of demand.
(Alfred Marshall, Principle of Economics(1890))
In the words of Paul A. Samuelson, "price elasticity of demand indicates the responsiveness of quantity demanded to the changes in market price." (Anthony Samuelson, Foundations of Economic Analysis, 1947).
When we talk of 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 of a product and its quantity demanded are closely related in the sense that each of these has a bearing on another.
As a result of this general trend every time the price for diesel or petrol climbs up CD companies immediately try to bring their prices down.
Similarly, when the supply of raw materials important for a CD to be built becomes unavailable or expensive all CD companies are forced to push their prices up.
This paper illustrates that own price elasticity of demand is higher for goods for which consumers have readily available substitutes as in that case in case of very small changes in own prices, ceteris paribus, the substitutes become more attractive. Further, short-term price changes lead to greater sensitivity to demand compared to long-term changes.
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
In this case, substitute goods generally refer to a pair of goods in which the consumers consider alternative. On the other hand, complementary goods are those that are used together; one item is usable only when the other item is