Explain the concept of elasticity of demand. What are the various uses of elasticity of demand? 2019-01-30

Explain the concept of elasticity of demand Rating: 8,2/10 773 reviews

The Concept of Elasticity

Price elasticity is a pure number, independent of units of measure. In the Determination of Output Level: For making production profitable, it is essential that the quantity of goods and services should be produced corresponding to the demand for that product. The knowledge of income elasticity is essential for demand forecasting of producible goods in future. It is easier to shift the burden of taxes on to the consumers if the product demand is assumed to be inelastic. Points E and H are very close to each other.

Next

Study Notes on Elasticity of Demand: Concept, Types and Importance

And the latter, in turn, depends, to a large extent, upon the respective elasticities of demand for the productive resources. On the contrary the demand for necessary goods like salt is inelastic. Trade union will be successful in raising the wage rate provided labour demand is deemed to be inelastic. The group members interpreted and analysed the article based on the core microeconomic concept of Elasticity. Note: While the result is a negative, economists typically don't show it that way in the formula. If the demand decreases, then the opposite happens: a shift of the curve to the left. 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.

Next

Elasticity of Demand: Concept of Demand Elasticity (explained with diagram)

The analysed article is attached in the Appendix. Elasticity of demand varies from point to point on a demand curve. Note in the diagram that the shift of the demand curve, by causing a new equilibrium price to emerge, resulted in movement along the supply curve from the point Q1, P1 to the point Q2, P2. . Such a commodity will be elastic in the long run when close substitutes may be produced. This is reflected in the cross elasticity of demand formula, as both the numerator percentage change in the demand of tea and denominator the price of coffee show positive increases. Unit elastic demand is when the quantity demanded changes in the same percentage as the change in price.

Next

Explain the Concept of Price Elasticity of Demand and Discuss Its Relevance for Business and Government

Price elasticity of demand measures the degree of responsive­ness of quantity demanded following a change in own price of the commodity, holding money income and prices of related goods constant. But as a business owner, you need to understand price and demand elasticity when building pricing strategies for your products or services. Thus, if 2 per cent change in price leads to 4 per cent change in quantity demanded of goods A ads 8 per cent change in that of B, then the above formula of elasticity will give the value of price elasticity of goods A equal to 2 and that of goods B equal to 4. The use of machines may reduce the cost of production and price. Many businesses focus most of the marketing attention on developing the product or service program and then promoting it; make sure you give price the time and attention it needs. Therefore the first aim of this essay is to outline the concept of the price elasticity of. To conclude this essay that the elasticity of demand is a measure of the responsiveness of product demand to changes in one of its determinants.

Next

What are the various uses of elasticity of demand?

Explain the relationship between the price elasticity of demand and total revenue. The concept may be used in understanding as well as tackling various economic problems: a Price Determination: Use of the concept of elasticity of demand is required in the price determination of a commodity under different market conditions. Another aspect of money is salaries. You'll see it most often when consumers respond to price changes. If tuition fee increases results to a decrease in the demand for dormitories, school dormitories are complements. Therefore, the organization is supposed to sell commodities at lower prices than charged by shopkeepers in the other bazars.

Next

Study Notes on Elasticity of Demand: Concept, Types and Importance

Between elastic and inelastic demand appears border situation, when the percentage change in price and then the percentage changes in quantity of products that is asked are equal in magnitude. For instance, as far as exchange rate i. Thus, the knowledge of elasticity of demand is essential for management in order to earn maximum profit. To explain their behavior better economists introduced the concepts of supply and demand. In other words, since elasticity of demand varies depending on the base, one should consider average price and average quantity demanded to calculate elasticity of demand.

Next

Study Notes on Elasticity of Demand: Concept, Types and Importance

An approximate example of perfectly inelastic demand is the demand of acute diabetic patient for insu­lin. As the years of the recession and war are going by, all aspects of the military are expected to do more with. Have you segmented your market by demographic, psychographic, geographic, and other factors? What are the impacts of various forms of elasticities elastic, inelastic, unit elastic, etc. Price will decrease and quantity will increase. In the first case, it will be in a position to charge a high price for its products and in the latter case it will be paying less for the goods obtained from the other country. Subsidy or protection is given to only those industries whose products have an elastic demand. It will now be clear that by inelastic demand we do not mean perfectly inelastic but only that price elasticity of demand is less than unity, and by elastic demand we do not mean absolutely elastic but that price elasticity of demand is greater than one.

Next

Study Notes on Elasticity of Demand: Concept, Types and Importance

Therefore, demand in Figure 13. The degree to which for a good or service varies with its. Price elasticity of demand is a way of looking at sensitivity of price related to product demand. A relatively elastic good is where elasticity lies between one and infinity, and a small change in price results in a relatively large change in demand. It is a matter of common knowledge and observation that there is a considerable difference between different goods in regard to the magnitude of response of demand to the changes in price.

Next

Price Elasticity of Demand: The Importance of Price Elasticity to Your Business

When price falls, quantity demanded rises and vice versa. In economics and business studies, the price elasticity of demand is a measure of the sensitivity of quantity demanded to changes in price. If, for example, price is raised by 10 percent and quantity demanded decreases by 10 percent the law of demand states the higher the price the lower the quantity demanded and vice versa , the increase in revenue from the higher price is exactly offset by the decrease in quantity demanded. At each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2. The demand determinants for which elasticity measures are typically computed are the price of the good or service, the income of the consumer, and the prices of related goods or services. The role of price change influences to a greater extent in the demand for these substitutes and compliments.

Next

12 Importance of Price Elasticity of Demand

Despite a wide variety of empirical methods and data sources, the demand for health care is consistently found to be price inelastic. Words: 311 - Pages: 2. This results in a negative cross elasticity. That is why products like wool, wheat and cotton having an inelastic demand are priced very high as compared to their byproducts like mutton, straw and cotton seeds which have an elastic demand. From the above discussion it is amply clear that price elasticity of demand is of great significance in making business decisions.

Next