Price Elasticity of Demand - Essay Example

The resulting coefficient for such is greater than 1 (Ed > 1). In addition, the result of a decrease in the price of the good is also an increase in its total revenue, otherwise, a decrease in its total revenue. ("Price Elasticity") Therefore, an increase in the prices of apples in the market will give a corresponding decrease in the total revenue of the good. This only means that if the price of apples is increased, consumers may decide not to buy the good any longer. However, if the price of apple decreases, people will tend to buy more apples.

It is also possible that the consumer will just try to find an alternative fruit instead that is cheaper than apples. On the other hand, if the change in quantity demanded of the product along with its price is less than 1 (Ed < 1), the product is said to be inelastic. In this condition, the percentage change in quantity demanded is less than the percentage change in price. Unlike the elastic good, inelasticity means that a decrease in price will result in a decrease in total revenue and vice versa.

("Price Elasticity") Inelastic products are basically the products that belong to the basic needs of man. One example of an inelastic product would be the salt wherein even with a large increase in its price, the demand would remain the same therefore there will be a relative increase in its total revenue. ("Price") The consumers in a given situation will not find any substitute for the salt, hence they will continue buying the good. Moreover, if the resulting coefficient or the price elasticity of demand of a particular good in the market is equal to 1 (Ed = 1), the good is unitary elastic.

This means that the percentage change in quantity demanded is equal to the percentage change in price. For a given situation that the price of a product is increased, its total revenue remains constant or unchanged. Meaning, at whatever price good is sold, the total revenue remains the same. ("Price Elasticity") In order to examine whether a product is perfectly competitive, monopolistically competitive, oligopolistic, or even monopolistic, the elasticity of demand for the particular good or product should be determined first since it determines its competitiveness in the market.

Elasticity and competitiveness of the product are determined according to the three main factors that affect both - the availability of substitutes, the share of budget spend on the good or product, and the adjustment of the goods to a price change over time. ("Price Elasticity") Just as the demand for apples is elastic, these factors affect its competitiveness in the market. The first two factors greatly affect the competitiveness of apples in the market such that substitutes are also supplied in the market, at the same time there is also a very limited budget allotted for fruits in the household budget.