The Price Elasticity of Demand - Essay Example

 If   ∆P denotes the change in price or rise in the same then ∆P = P1 – P2; similarly if ∆Q refers to the change in the quantity demanded or decline in the same then ∆Q = Q1- Q2. Now if Ed refers to the price elasticity of demand then Ed = (∆Q/Q1)/ (∆P/P1).

In the given economic problem, on the quantity demanded side, Q1 = 35 gallons of paint, Q2 = 20 gallons a month. On the other hand, the price of the paint was initially $3.00/gallon which is P1 = $3.00, and the price of the paint raised to $3.50/gallon, hence P2 = $3.50. Following the paragraph above, ∆Q = (35 - 20) gallons = 15 gallons. Similarly ∆P = $(3 – 3.5) = - $0.5. If now we put all these data into the equation that we have mentioned for price elasticity of demand we will find –

Ed= (∆Q/Q1)/ (∆P/P1) = ∆Q/Q1 X P1/∆P = 15/35 X 3/-0.5 = - 3/7 X 6 = - 2.57 (approximated)

Here the price elasticity of demand has been determined at – 2.57, which is less than – 1. Following the price elasticity of demand, we classify goods as elastic or inelastic. If the price elasticity of demand is 0 then any rise in the price will not affect the quantity consumption of the commodity. This happens if the good has no substitutes, the goods are of extreme importance and the customer is immensely loyal to the concerned brand. This is an extreme case and seldom is a real-life example of the same available. If the price elasticity lies amidst – 1 and 0 that is – 1< Ed < 0 then the goods are of relatively inelastic demand. This implies it has fewer substitutes and is of relatively lesser importance than the previously mentioned case. From another angle, one might question that the brand loyalty of the customer is not quite like what is in the first case but it is there. Again If Ed is equal to -1 then the product is unitary elastic. The change in price is equally compensated by the change in demand for the commodity.  If the price elasticity of demand that is Ed tends to infinity then that commodity must have infinite numbers of substitutes, absolutely no brand loyalty in its account, and of no importance at all to the consumer at the changed price. This is again an extreme case. The price elasticity of the paint that has been determined is greater than negative infinity yet less than -1 that is -∞ < Ed < -1. This is when the elasticity of demand for a commodity is called elastic. This happens when the concerned product has several substitutes and less brand loyalty and also lesser importance at a changed price; since following a change in price its quantity is more than compensated. The product that has been considered is painted in broad terms; it is possible that a group of paint has experienced the price rise while others have kept it low; making it easy for the painter to change between brands. But considering the fact that the total consumption of paint has declined a shift towards other forms of means of painting such as watercolor, pastel, and sketch seems more feasible. It might also be true that courting a rise in the price of paint the painter (that is me) has decreased my volume of painting having no other means left. Another aspect that might be taken into account is that Paint comprises a substantial part of the painter’s expenditure and while purchasing the paint considerable attention would be paid to this fact following this reason. Here Income effect would be substantial though this is for the time being not a part of our discussion