StudentShare solutions
Triangle menu

Elasticity of Demand - Essay Example

Not dowloaded yet

Extract of sample
Elasticity of Demand

When one of these two changes, the other also tends to change. This tendency is very well described by what is popularly known as Law of Demand. The law of Demand is a general law which need not be applicable in all situations. In certain situations this law seems to be unrealistic. The Law of Demand states that when the price increases, the quantity demanded decreases and vice versa, other things remaining the same. The phrase 'other things remain the same' is an important one that it portrays the exceptions of Law of Demand. The Law of Demand, therefore postulates the direction of change in one variable (price or quantity) due to the change in other variable. The law is silent about the magnitude of change. That means, it does not talk anything about the degree by which demand changes as a result of a change in price. Here lies the importance of Elasticity of Demand. This concept tells us the extent to which demand increases or decreases owing to a decrease or increase in price. Therefore, Law of Demand is a qualitative measurement whereas Elasticity of Demand is a quantitative measurement.
As stated earlier, elasticity is a measure of responsiveness of quantity demanded for a change in price. ...
Mathematically, it may be computed as:




(Moffatt Mike: Elasticity of Demand)

To calculate percentage change in quantity and percentage change in price, the following formulae can be sued:

% change in quantity = Quantity (new) - Quantity (old) / Quantity (old)


(Moffatt Mike: Elasticity of Demand)



% change in Price = Price (new) - Price (old) / Price (old)


(Moffatt Mike: Elasticity of Demand)

Price Elasticity of Demand
The Price Elasticity of Demand is the measure of responsiveness of quantity demand of a product as a result of change in its own price. This is also known as Own Price Elasticity of Demand. This theory measures the rate of response of quantity demanded due to change in price. Price Elasticity is a common phenomenon because price and demand are the two closely related variables. In other words, price is the most important determinant of demand. Price of a product and its demand are negatively correlated, which means when price increases, demand decreases and vice versa. Mathematically, price elasticity of demand can be expressed as below:


Price Elasticity of Demand = (% Change in quantity demanded)/ (% change in price)


(Moffatt Mike: Price Elasticity of Demand)



% Change in quantity demanded = Quantity (new) - Quantity (old) / Quantity (old)


(Moffatt Mike: Price Elasticity of Demand)



% change in price = Price (new) - Price (old) / Price (old)

(Moffatt Mike: Price Elasticity of Demand)


Significance of Price Elasticity
The calculation of price elasticity alone is not sufficient to an economist for decision making. It is a means to an end. Thus, interpretation is more important than computation. The purpose of calculating elasticity is for analyzing how sensitive is the demand for the product due to a ...Show more

Summary

It is an important concept in micro economics/managerial economics. It has much practical utility in the real life business situations ranging from vegetables to crude oil. Everyday we purchase various products at varied price in different quantities. The consideration which we pay for a product at a certain quantity is called the price of the product…
Author : xullrich
Elasticity of Demand essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Elasticity of Demand"
with a personal 20% discount.
Grab the best paper

Related Essays

Price Elasticity of Demand
If the demand for corn increases due to its use as an alternative energy source, there will be a decrease in the supply of corn's substitute such as soybean. This is because change in the price of related goods is a determinant of demand (McConnell & Brue, 2002).
2 pages (500 words) Essay
Price Elasticity of Demand
Individuals would not buy the product as they used to and the quantity demanded will fall whilst the firms would supply more of the product i.e. the supply curve will move to the right. In the case above, if the demand for corn increases, there would be a shift in the demand curve to the right.
2 pages (500 words) Essay
Proce Elasticity of Demand
The most common description as crafted by Alfred Marshall is the percentage change of the quantity of a product demanded in response to a one percent change in the price of the product with all other factors remaining constant (Marshall 1920). When the change in demand is relatively unaffected (where the PED is less than 1), the goods sold are considered to be inelastic.
4 pages (1000 words) Essay
Price Elasticity of Demand

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. The 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.

4 pages (1000 words) Essay
Elasticity of Demand Essay
(Alfred Marshall, Principle of Economics(1890)) In the words of Paul A. Samuelson, "price elasticity of demand indicates the responsiveness of quantity demanded to the changes in market price." (Anthony Samuelson, Foundations of Economic Analysis, 1947).
7 pages (1750 words) Essay
Price elasticity of demand
A certain good in the market can obtain several forms of demand elasticity - elastic, inelastic, and unitary elastic. A product that is elastic obtains a condition wherein the percentage change in the quantity demanded is greater than the percentage change in price.
2 pages (500 words) Essay
Elasticity of demand
e in the industry is the price elasticity of demand which is the percentage change in quantity divided by the percentage change in price (Varian, 2003). The price elasticity of demand behaves differently depending on the market structure a firm operates in. This paper analyzes
2 pages (500 words) Essay
The elasticity of demand

This paper illustrates that own price elasticity of demand is higher for goods for which consumers have readily available substitutes as in that case in case of very small changes in own prices, ceteris paribus, the substitutes become more attractive. Further, short-term price changes lead to greater sensitivity to demand compared to long-term changes.

4 pages (1500 words) Essay
Elasticity of Demand
In other words PED, gives the percentage change in the quantity demanded as a response to a change in price mostly by one percent. It should however be noted that this is based onceteris paribus, which means that all
1 pages (250 words) Essay
Price elasticity of demand
The easier it is to swap, the more elastic the demand of such a product is (Mankiw 90). Type of want is satisfied by product; if the product satisfies basic needs or necessities such as medical care, basic food stuff and housing, then the price elasticity of such
1 pages (250 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation