Price Elasticity Of Demand Essay

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

When taxes such as excise taxes and indirect taxes such as VAT are placed by the government, the government takes into account the price elasticity of demand of a product and the response of the consumer if price were to rise. The tax burden depends on the price elasticity of demand to establish of whom is to take majority of the burden. When price elasticity of demand is inelastic, the consumer will take majority of the tax burden. Tax incidence falls on the group that responds the least to price and has the most inelastic curve. The tax burden can possibly be split evenly between producer and consumer, by the decision of the producer. This occurs if the producer predicts the consumer will not respond well to a product’s rise in price, making the product now elastic and the majority of the burden would be placed on the producer. To resolve this matter, the producer pays a percentage of the tax burden and the consumer the remainder. However, if a product has an inelastic demand such as fuel and cigarettes, an excise tax that focuses on these individual products is used. Businesses determine price with the use of price elasticity of demand. If a business were to increase the price of an elastic good, it would be more affected than increasing an inelastic good. Consumers would stop spending money on

Governments also rely heavily on price elasticity of demand when imposing 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