Price Elasticity And The Concept Of Price Elasticity Of Demand

Introduction

In this essay we will be elaborating on the concept of price elasticity of demand. To execute this objective we will cover how demand is impacted due to the change in price and how this is measured.

Price elasticity of demand is considered to be how price sensitive the quantity demanded of a good is to the change in a price, with all other factors remaining constant. In other words, it is the change in the amount of goods consumers demand when there is a change in price level.

Price elasticity measures how consumers respond to a change in price levels. But how exactly is it measured?

It is measured via the percentage change in quantity over the percentage change in price. The reason why they do this, as opposed to just a change

Here elasticity is equal to infinity.

Factors that cause a shift in demand

Factors that cause a shift in demand affect price elasticity of demand because it changes the quantity demanded, which is used in the equation of price elasticity of demand. These factors include:

• Price of substitute goods: a decrease in the price of substitute products will increase the quantity demanded of the current product. The opposite will occur with a decrease in price.

• Price of complement goods: an increase in the price of a good that complements another will decrease quantity demanded. The opposite will occur with a decrease in price.

• Expected future prices: if you expect future prices to increase you will buy more goods now, increasing quantity demanded. The opposite will occur if you expect a decrease in future prices.

• Expected future income: if you expect your future income to increase, you will purchase more now, increasing quantity demanded. The opposite will occur if you expect a decrease in income.

• Population: and increase in the population will increase quantity of goods demanded. A decrease in the population will decrease the quantity of goods

Imagine that when petrol prices increase by 50%, petrol purchases fall by 25%. Using the formula above, we can calculate that the price elasticity of petrol is:

Price Elasticity = (-25%) / (50%) = -0.50

Thus, we can say that for every percentage point that petrol prices increase, the quantity of petrol purchased decreases by half a percentage point. Price elasticity is usually negative, as shown in the above example. That means that it follows the law of demand; as price increases quantity demanded decreases. As petrol price goes up, the quantity of petrol demanded will go down. Price elasticity that is positive is uncommon. An example of a good with positive price elasticity is caviar. The buyers of caviar are generally wealthy individuals who believe that the more expensive the caviar, the better it must be. Thus, as the price of caviar goes up, the quantity of caviar demanded by wealthy people goes up as well.

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