Price Elasticity of Demand - Essay Example

 One of the major concepts of microeconomics is price elasticity of demand, which refers to sensitivity levels of demand for a given product or service to changes in its price. Elasticity of demand co-efficiency is the percentage change in the quantity of a product or frequency of a service in reference to percentage variation in price. Changes in price levels and quantity conversely relate to each other, with the obvious implication of a decrease in product demand with increase in its price. Demand on the other hand refers to the amount of a commodity that buyers are willing and capable of buying at a given price level. Many factors determine price elasticity of demand in a free market economy. Firstly, the product uniqueness and availability of close substitutes in the same market determine elasticity of demand in that the presence of many close substitutes will lead to a huge shift in demand if prices of that commodity changes. This is because consumers have an alternative to satisfy their demand as opposed to when the commodity is unique, in which case they will have no option than to adjust to the price changes. For instance in a market with many operators like tours and travel businesses offering a wide range of packages make the operators price sensitive, since any small changes in prices from competitors can lead to massive shift in demand for their services. Another factor is the cost of changing from one product to another for those products that have penalties in case of changes from one provider to another. Of course, whether the product in question is a basic need or a luxury that one can do without is another factor that greatly affects the elasticity of demand. Demand for basic needs including food, medical attention and education is mostly inelastic since people must always use these products regardless of their prices. For luxuries like holidays, expensive cars and entertainment among many others, demand is highly elastic since changes in prices will either make more people take them up or make their demand go down. A simple illustration of this is the recent global recession, which saw visible cutbacks on individual and corporate spending on luxury goods, with many people tacking on public transport systems in favour of fuelling private cars due to increased fuel pump prices. Other factors that affect the elasticity of demand include changes in income levels, persistence of price changes, and product demand patterns among others. With changes in market dynamics, burgeoning population, increasing competition in job markets, and rapid technological changes that out phase odd manual jobs, demand for formal education has skyrocketed over the last decade. This happens as people strive to better their competitiveness in securing formal employment. Placing high value on academic certificates as an essential aspect in securing any employment has led to an increased demand for further education across board, which in turn creates high demand for colleges and universities, giving way to the proliferation of many institutions offering bachelor degrees and masters as well. A study on income levels among employees with different academic qualifications reveals that there are wide disparities in salaries of diploma, degree and masters degree holders. Salaries increase with increase in academic qualifications with master’s degree holders earning twice as much as degree holders who in turn earn twice what high school diploma holders earn on average. Those with no formal education form the bulk of unemployed population across the country, often performing poorly paid manual jobs in homesteads, municipal councils and mining zones among other similar places. Office jobs are a preserve for the highly qualified in formal education, especially those with bachelor degrees and above. Management jobs are common with master’s degree holders and those with many certificates in support courses relevant to their field of occupation. This state of affairs places high value on formal education, which is only verifiable through college and university certificates. It is for this reason that many private institutions, colleges and universities offering advanced diplomas, degrees, master’s degrees, and PHDs have surfaced all over the place, with the sole objective of supplying already existing demand in the market. As with the general law of demand and supply, increasing product demand will lead to increased prices for the product, which in turn entices producers to increase their market supply for that product. With such a scenario, there is always the question of quality assurance, as checks and controls from relevant state authorities may be unable to monitor changes in quality of products supplied. Similarly, with every booming business, there exist the presence of black markets and mavericks offering substandard products through illegal channels that evade statutory and institutional quality controls. In the end, the market floods with a cocktail of genuine products, substandard products and obsolete products, all geared at making profits while satisfying existing demand. Critics of this booming demand and supply for education point to this situation when they question the proliferation of colleges and universities whose authenticity is questionable, often inclined to offering low quality products. Of great concern is the manner in which demand remains inelastic despite high prices charged and abundance of institutions offering similar products. Micro economic concept of price elasticity of demand as explained earlier in the text best explains this scenario. High value attached to formal education offered by these educational institutions is the only logical explanation to this scenario. With increasing cost of living and fixed income levels in any grade, say for example for diploma holders, it becomes increasingly important to get a degree in order to increase income levels to cope with rising expenditures. The same case applies across the continuum, with those holding qualification in a given level striving to achieve the next one. Further, people opt to hold several qualifications, say degrees for instance, in order to boost their chances of securing jobs. This scenario keeps demand for education at a constant upward trend, defying the law of demand and supply. Even when people fail to secure a job after completing one degree, they find it viable to pursue another degree in a different field in the hope of finding solace there. It is for this reason that millions of dollars either in savings or in bank loans are finding their way into educational institutions. Although payback periods for the enormous amounts invested in education are longer, systems as they are at present encourage people to invest more in education with hope of long-term formal employment. In conclusion, determination of whether current focus on education is a bubble that will burst soon or not is a hard situation to determine. With the high value attached on academic achievements in determining success or failure in life thanks to security placed in academic certificates, this may at least in the near future be more than just a bubble. However, based on reviews on earlier booming activities like computer and information technology studies and housing, it is prudent to trade with caution, since a slumber in the current trajectories may send the current situation crumbling into disappointments. Read More