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Factors affecting price elasticity of demand essay
Effects of price elasticity of demand
Concepts of price elasticity of demand
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Price Elasticity
The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high.
A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life.
To determine the elasticity of the supply or demand curves, we can use this simple equation:
Elasticity = (% change in quantity / % change in price)
If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic.
As we mentioned previously, the demand curve is a negative slope, and if there is a large decrease in the quantity demanded with a small increase in price, the demand curve looks flatter, or more horizontal. This flatter curve means that the good or service in question is elastic.
Meanwhile, inelastic demand is represented with a much more upright curve as quantity changes little with a large movement in price.
Elasticity of supply works similarly. If a change in price results in a big change in the amount supplied, the supply curve appears flatter and is considered elastic. Elasticity in this case would be greater than or equal to one.
On the other hand, if a big change in price only results in a minor change in the quantity supplied, the supply curve is steeper and its elasticity would be less than one.
A. Factors Affecting Demand Elasticity
Inelastic demand means that an increase or decrease in price will not significantly affect demand for the product. In spite of the rising prices for the Blue Jays tickets, fans were expected to turn out in large numbers. This inelastic demand for the tickets can be attributed in large part of the fact that their teams plays so well in 1998, and another factor is that the Blue Jays fan could never stay away from their team. Another inelastic demand for the Blue Jays tickets is that there is no other locally substitute team.
The price elasticity of demand is a measurement that illustrates the responsiveness to changes in price of the demand. For example, it is specifically related to the simulation in regards to shifting the price up and measuring how much the demand falls. It is a percentage change in quantity. The presence of substitute goods, such as detached housing, has the effect of increasing the price elasticity of the demand. Housing is a necessity, which helps to hone down the elasticity. The revenue is maximized when the elasticity is equal to one.
The Keynes effect says that higher price level will cause a lower real money supply, which would increase the interest rates from the financial market. The demand curve illustrates a relationship by the quantity of output and the price level of the aggregate demand. This demand is expressed over a fixed level of nominal supply in money. Some of the factors that shift the aggregate demand curve to the right are the increase in money supply, government spending or consumption spending or as simply decreasing taxes. The aggregate demand curve is the total sum of every individual sector of the economy, usually described a linear sum.
As the firm’s prices increase, the customer demand for their product (buildings) decreases. I was able to figure this out with numbers I received from the 2016 Annual Report. Lendlease produces a normal good, so as the income of the consumer/customer increases, the demand for Lendlease should increase. The crossed elasticity depends on whether you are looking at a competitor of Lendlease or a company that complements Lendlease. A competitor would put you at a crossed elasticity above zero, meaning that as the price of the competitor increases, the demand for Lendlease would also increase. If you were looking at a complement of Lendlease (an electrician, plumber etc.), you would have a crossed elasticity below zero. So if the price of using an electrician/company goes up, the quantity of buildings that Lendlease can produce goes down, since it costs more per project to use that
The law of demand states that if everything remains constant (ceteris paribus) when the price is high the lower the quantity demanded. A demand curve displays quantity demanded as the independent variable (the x-axis) and the price as the dependent variable (the y-axis). http://www.netmba.com/econ/micro/demand/curve/
Elasticity is also prominent to businesses. The price elasticity of demand is very important for companies to determine the price of their products and their total sales and revenue. Newell showed that by cutting the price of the Left 4 Dead game in half to $25 during a Valve promotion, its sales increased by 3000 percent (Irwin, 2009)viii.
Elasticity is the responsiveness of demand or supply to the changes in prices or income. There are various formulas and guidelines to follow when trying to calculate these responses. For instance, when the percentage of change of the quantity demanded is greater then the percentage change in price, the demand is known to be price elastic. On the other hand, if the percentage change in demand is less than then the percentage change in price; Like that of demand, supply works in a similar way. When the percentage change of quantity supplied is greater than the percentage change in price, supply is know to be elastic. When the percentage change of quantity supplied is less then the percentage change in price, then the supply then demand is known to be price inelastic.
For commodity goods, consumers are more inelastic to price changes. As commodities are at affordable price, the price differences are rather small. Therefore, lowest price is not a main concern for most consumers.
A change in quantity supplied is just a movement from one point to another in the supply curve. In opposite, the cause of a change in supply is a change in one the determinants of supply that shifts the curve either to the left or the right. These determinants are the resource prices, technology, taxes and subsidies, producer expectations, and number of sellers. An equilibrium price is required to produce an equilibrium quantity and a price below that amount is referred as quantity supplied of zero no firms that are entering that particular business. If the coefficient of price is greater than zero, as the price of the output goes up, firms wants to produce more of that output. As the price of the output goes up it becomes more appealing for the firms to shift resources into the production of that output. Therefore, the slope of a supply curve is the change in price divided by the change in quantity. The constant in this equation is something less (negative number always) than zero because it requires strictly a positive...
When demand is elastic as with Coca Cola products price changes affect total revenue. When the price increases revenue decreases and when the price decreases revenue increases. For Coca Cola if they notice a decrease in revenue they would offer products at a discount to increase revenue. They do this quite often with sales such buy 2 20 oz. bottles for $3 instead of the normal $1.89 each price
Figure I I .4 illustrates the effects of an increase in demand. OD is the original demand curve so that the equilibrium price is P and quantity Q is demanded and supplied.
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
That is, it is sensitive to price change, and also to the quantity demanded. This means that if many people are consuming a good, the demand is greater than if less people are consuming the good. To further clarify, take the example of attending college. In an environment where most of an individual's peers are going to attend college, the individual will see college as the right thing to do, and also attend college to be like his peers. However, in an environment where most of an individual's peers are not going to attend college, the individual will have a decreased demand for college, and is unlikely to attend.
In the automobile industry, there are factors that cause a shift in the supply and price elasticity of the supply and demand. These factors can cause the supply demand to reduce or raise the demand for the automobiles. One factor to consider is if the price of steel rises. Automobile manufacturers will then produce fewer automobiles at all different price levels and the supply curve will then shift. Another factor to consider is if automobile workers decide to go on strike for higher wages. The company will be forced to pay more for labor to build the same number of automobiles. The supply of these automobiles will decrease. Lastly, another factor that can curve a shift in the supply curve could be if the government imposes a new tax on car manufacturers. In all of those cases, the supply curve will move because the quantity supplied is lower at all price levels.
In the short-run the price elasticity of demand is high, however, in the long run the elasticity is not very high (Pascal 1967).