The Concept Of Price Elasticity Of Demand Essay example

The Concept Of Price Elasticity Of Demand Essay example

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The concept of Price Elasticity of Demand (PED) measures the responsiveness of quantity demanded by consumers to a change in product price. It is used by businesses to forecast sales, set the most effective price of goods and determine total revenue (TR) and total expenditure (TE). Similarly, governments also use price elasticity of demand when imposing indirect taxes on goods and setting minimum and maximum prices. Marginal revenue is also determined by the price elasticity of demand. Price elasticity of demand is used to predict the quantity shift in the supply curves and the effect on price for a product, and is usually always negative as it is the relationship between price and quantity demanded is an inverse one. PED is measured by calculating the percentage change of quantity demanded and dividing it by the percentage change in price (%∆Qd/ %∆P). The price elasticity demand of a product comes under the terms perfectly elastic, relatively inelastic, relatively elastic, unit elastic or infinitely elastic.
If a product’s percentage change in quantity demanded divided by the percentage change in price is smaller than one it is relatively elastic (1

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...ng taxes and setting minimum or maximum prices. Whilst determining PED it is essential to take into account the determinants of price elasticity of demand. These include the number of substitutes and the closeness of them, the period of time taken for consumers to find substitutes and the proportion of income spent on goods. The elasticity of a product will fall into five types of elasticity; perfectly elastic, relatively elastic, relatively inelastic, unit elastic or infinitely elastic. Governments place taxes such as excise and indirect taxes on goods that have price inelastic demand this creates tax revenue for the government and was created so that the consumers paid majority or all of the tax of the product. Without price elasticity of demand, businesses and government would not be able to calculate the responsiveness of quantity demand to a change in price.

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