The Concept of Price of Elasticity of Demand

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The Concept of Price of Elasticity of Demand

Businesses know that they face demand curves, but rarely do they know

what these curves look like. Yet sometimes a business needs to have a

good idea of what part of a demand curve looks like if it is to make

good decisions. If Pepsi Coca raises its prices by ten percent, what

will happen to its revenues? The answer depends on how consumers will

respond. Will they cut back purchases a little or a lot? This question

of how responsive consumers are to price changes involves the economic

concept of price elasticity. Therefore the first aim of this essay is

to outline the concept of the price elasticity of demand. It will be

focused on 3 aspects, first, definition of the price elasticity of

demand, second, elastic versus inelastic, and finally some factors

influencing the price elasticity of demand will be interpreted. Also

in this essay, it will be discussed that the price elasticity of

demand in health care market.

The price elasticity of demand measures the responsiveness of quantity

demanded to change in price, with all other factors held constant.

The price elasticity of demand, Ed is defined as the magnitude of:

Proportionate change in quantity demanded

……………………………………………………….

Proportionate change in price

Since the quantity demanded decreases when the price increases, this

ratio is negative; however, the absolute value usually is taken and Ed

is reported as a positive number.

Because the calculation uses proportionate changes, the result is a

unitless number and dons not depend on the units in which the price

and quantity are expressed.

As an example, if a 2% increase in price resulted in a 1% decrease in

quantity demanded, the price elasticity of demand would be equal to

approximately 0.5. It is not exactly 0.5 because of the specific

definition for elasticity uses the average of the initial and final

values when calculating percentage change. When the elasticity is

calculated over a certain arc or section of the demand curve, it is

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