Questions in Principle of economy - Essay Example

Economists use the concept of elasticity to define the sensitivity of consumers to the change that happens in prices of goods and services. In general understanding elasticity is a reaction’s measure of one variable on the changing of another variable expressed in percentage. There are several types of elasticity, one of which is the price elasticity of demand. This indicator shows the percentage of demand changing under the influence of price changing also expressed in per cents. In other words, the coefficient of price elasticity defines how many per cents of changing the volume of demand will have if the price changes by 1 per cent.

Formula of the mentioned indicator is the following: If calculated rate is bigger than 1 then demand on the product is elastic. This means that if price changes by 1 per cent then demand will change by more than 1 percent. So decrease in price on the product will cause sharp increase of sales that enlarges the level of total revenue. Therefore, in such situation the policy of decreasing the price can be very effective and may bring additional profits afterwards. Hence, for instance, for the telecommunication service providers, the higher the elasticity the better, because cutting prices will affect the growth in demand which in its turn will boost profits (Weingarten and Stuck 2001, pp. 32). If calculated formula of elasticity reaches 1 sharply then there is a unit elasticity, which indicates that 1 per cent change of price causes the same percentage change of demand.

In this respect, the fall of price is compensated with the rise of sales and the total revenue remains unchangeable. The products with elastic demand are considered those goods that are easy to substitute. Luxury goods also have coefficient of elasticity that exceeds 1. For example, pieces of art are the products with elastic demand. Articles of prime necessity, such as, for example,