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The Concept of Price Elasticity of Demand - Essay Example

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In the paper “The Concept of Price Elasticity of Demand” the author analyses elasticity, which is used to measure the effect of change of one economic variable affect others. Elasticity can be defined to be the ratio of percentage change in one variable…
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The Concept of Price Elasticity of Demand

Download file to see previous pages... The sign of price elasticity is more frequently than not “negative although analysts tend to ignore the sign as it can lead to ambiguity”. However, the positive price elasticity of demand can be achieved for Giffen goods or goods that “do not conform to the Law of Demand”. A less than one value of price elasticity of demand value implies inelasticity of a good i.e. change in the price conditions seems to have a small effect on the quantity demanded of that good (Marquez, 2002, p. 22). The demand for a good is said to be elastic when the value of price elasticity is greater than one which small changes in the price level will have significant effects on the quantity demanded of that good. Revenue can be “maximized when the value of price elasticity of demand is equal to one”. The formula for the price elasticity of demand is provided below:
 The term income elasticity of demand is used to define the change in demand conditions due to change in income of the consumers in an economy keeping other conditions as constant. A negative value of the income elasticity can be achieved in case of inferior goods where a rise in income of the consumers will lead to falling in demand for that good. A positive value of price elasticity of demand can be achieved in case of “normal goods where an increase in income will lead to rising in demand” conditions for that good whereas if the value of income elasticity of a good is less than one implies the good is a necessity good (Flynn and Antonioni, 2011, p. 124). Again “if the elasticity is greater than one then the good can be categorized as the luxury or superior good”. ...Download file to see next pagesRead More
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