It is a common misconception among executives and businessmen faced with rising costs or the need to improve profit margins that increasing the price of ones product is an effective way to increase revenue. Also, when the government imposes an excise tax the common tendency is…
This paper will discuss the concept of elasticity and how a government tax on a product -- in this instance, cigarettes -- can affect the business firm in terms of how much a specific tax on cigarette can be shifted to the buyer and how much has to be absorbed.
Price elasticity (Ep) of demand is the ratio of the percentage change in quantity to the percentage change in the price of a product or service, all other things remaining unchanged. Algebraically, this is expressed as follows:
where P and Q are the price and quantity, respectively. This formula assumes point elasticity instead of an arc price elasticity for simplicity sake, as our objective of understanding the concept of elasticity can be sufficiently served by this simple assumption.
Price elasticity measures how responsive the sales would be in relation to changes in price. Products and services inherently have different price elasticities, so that managerial decisions on expansion or reduction of output would depend to an important degree on how accurate are the determination of such elasticities. At the outset, we may consider the benchmark elasticity = 1 as indicating that a percentage change in price is just equaled by the same percentage change in quantity demanded. Where demand is somewhat less responsive to changes in price, we can say that demand is relatively inelastic -- that is to say, a percentage increase in price triggers a lower percentage change in quantity demanded. Demand is relatively elastic when a change in price causes a larger percentage change in quantity demanded. A vertical demand curve denotes perfectly inelastic demand with an Ep of 0, whereas a perfectly elastic demand would be a horizontal demand curve with an Ep of infinity ( ∞).
An important elasticity criterion is whether a good is a necessity or a luxury. A necessity has an inelastic or relatively inelastic demand curve. A good that is inessential (or a luxury) has a relatively elastic demand curve; ...
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(BUSINESS ECONOMICS Essay Example | Topics and Well Written Essays - 1250 Words)
“BUSINESS ECONOMICS Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.net/miscellaneous/384153-business-economics.
Standard has already have taken back the ‘AAA’ status that it had once given to the US economy. Predictions of OECD OECD has predicted more trouble for the US economy in the near future. The organization has forecasted shrinkage of the world economy owing to the recent financial crisis that led many US companies to bankruptcy.
Introduction The very recent outburst of the housing price bubble in the most advanced and developed economies of the world has raised in serious concerns about the management of the macroeconomic tools, measures to combat the inflationary pressures especially by the public authorities, as that led to a financial crisis, and the consequences of the financial crisis had to be faced by the global financial economy.
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