Price Elasticity Of Demand Essay

Question 1

(a) Explain what the term ‘price elasticity of demand’ means, making use of appropriate

Examples.

Price elasticity of demand illiterates the change in quantity demanded as price changes. Elasticity is the responsiveness of how a simple change in one variable can escalate another change in particular the change in demand and supply. The formula for calculating the price elastic demand is Price Elasticity of Demand = % ∆ In Quantity Demand / % ∆ In Price. Relating to Price elasticity demand an example I can give is assuming that the prices of electricity went up by 50% and purchases of electric went down by 25% by using the formula above we can calculate that the price elasticity of electric is Price Elasticity = (-25%) / (50%) = - 0.50. Therefore for every percentage electric increases the quantity purchases decreases by half a percentage. Price elasticity is usually negative which is stated in the example as electric prices goes up the quaintly of electric demanded will drop. In addition it means that it cooperates with the law of demand as price increases quantity demand decreases. The understanding of price elasticity is very important to know how the relationship between the price and demand of the product and how it can determine the products demand. If the quantity demanded changes a lot while the price changes a little bit that products is elastic this can mainly be products which have alternatives and products which can change consumers mind if price changes by even 1p. For example if the price of paracetamol A increases the quantity demanded will fall when consumers swap to the cheaper paracetamol B. No change in price and no change in demand this product is inelastic. For example as the price of petroleum i...

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... a cause for price to go up as many companies have large amount of borrowings. Finally exchange rates may affect the company especially if they import there raw materials. For example the demand for Gasoline is high as we need gas to live but even with the prices soaring up by 40% 50% people still buy gasoline as it is a essential need in life but when the shortage of supply occurs this pushes the prices to rise therefore Cost push Inflation Occurs.

At the new equilibrium you have a shortage of supply which pushes the price up which represents cost push inflation.

Question 5

(a) Provide an example of how a government could use fiscal policy to achieve an increase in employment. Make use of appropriate diagrams.

(b) Provide an example of how a Central Bank could use monetary policy to achieve economic growth. Make use of appropriate diagrams.