Preview

Price, Income and Cross Elasticity of Demand

Better Essays
Open Document
Open Document
1460 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Price, Income and Cross Elasticity of Demand
Explain what is meant by the terms price elasticity, income elasticity and cross elasticity of demand and discuss the main determinants of each of these. Discuss the importance of each of these to the decision making process within a typical business.

Elasticity is the responsiveness to which one variable responds to a change in another variable Price elasticity of demand (PED) measures the responsiveness of quantity demanded of a product to a change in its price. If a relatively small change in price leads to a relatively large change in demand, the product is said to be 'elastic'.

Whereas if quantity demanded is relatively unresponsive to a change in price the product is said to be 'inelastic'.

Price elasticity of demand can be given a numerical value which is just a number and not in terms of any particular unit. The resulting numerical figure will always be a negative number due to the inverse relationship between price and quantity demanded, but can be ignored. This numerical figure can be calculated by:Price elasticity of demand = percentage change in quantity demanded Percentage change in price For example if the price of a product rises from £20 to £24, which is a 20%change and demand falls from 400 units to 300 units, which is a 25% change, the calculation will be:25% = -1.2520%When the percentage change in price leads to a smaller percentage change in quantity demanded price elasticity of demand will be a number between 0 and -1 and the product is said to be 'inelastic'.

On the other hand when the percentage change in price leads to a larger percentage change in quantity demanded price elasticity of demand will be a number between -1 and - infinity and the product is said to be 'elastic' such as the product used in the example above.

If the price elasticity of demand is exactly 1 the product is said to have 'unit'price elasticity of demand. This occurs when a percentage change in price leads to an equal percentage change in quantity demanded.

If a

You May Also Find These Documents Helpful

  • Good Essays

    EGT1 Task 2

    • 932 Words
    • 4 Pages

    When the change in price percent is less than the change in demand percent, this is referred to as inelasticity. For this example, let’s say we have a 6% reduction in the price of bread but it only increases the demand by 3%.…

    • 932 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Egt Task 309.1.2-08, 09

    • 2481 Words
    • 10 Pages

    If the elasticity of demand coefficient is zero, then the demand is perfectly inelastic. Consumers demand had no response to a change in the price of a good. When consumers respond to a change in price, the demand is elastic if the elasticity of demand coefficient is greater than one, or when the change in price of a good causes a…

    • 2481 Words
    • 10 Pages
    Good Essays
  • Good Essays

    EGT1 Task 2

    • 1144 Words
    • 3 Pages

    Elasticity of Demand pertains to the relationship of price and need of a product. If a price increases will the demand increase or decrease? When a demand is elastic, it means even a small change in price can cause a large change in the quantities consumers purchase. (McConnell, pg. 77) So for example in an elastic demand if you reduce the price of a good the demand will increase a large amount and revenue then increases. When the is inelastic, according to McConnell it means when there is a price change it only causes a small change in the amounts consumer purchase. This can result in less total revenue. If a company drops the price of something, even if they sell more it doesn’t mean they will make more overall. If it is inelastic, the revenue can drop. There is also something called perfectly inelastic, which means and change in price results in absolutely no change in demand. This is rare and an extreme situation. There is also demand in unit elastic which “demands occurs where a percentage change in price and the resulting percentage change in quantity demanded are the same”. (McConnell, pg. 77)…

    • 1144 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Eco 365 Final

    • 1144 Words
    • 5 Pages

    Price elasticity that relates to demand is determined by many factors. Price elasticity is measured by the change in price and the response from consumer demand. The demand of a good or service will vary the price in the item. The most important factor to determine the price elasticity of demand is necessity. If a good is a necessity, the demand will seldom change and the price is able to be adjusted. The demand is the most important due to the freedom it provides for price adjustment and inventory control. With necessity comes an inelastic price. Other factors such as the price of a good and competition are also important but demand is what drives sales and removes the barrier of lost profits to create demand.…

    • 1144 Words
    • 5 Pages
    Good Essays
  • Better Essays

    Business Proposal Eco 561

    • 1740 Words
    • 7 Pages

    Elasticity of demand tells if a product will sell less or more if the price changes in either direction. The elasticity of In and…

    • 1740 Words
    • 7 Pages
    Better Essays
  • Satisfactory Essays

    Week 1 Knowledge Check

    • 358 Words
    • 2 Pages

    Inelastic goods are necessities that consumers continue to purchase even when the price increases. This increases the revenue, as more is paid for each good. The percentage change in price increases faster than the change in quantity, which may remain constant. When more is paid for a good or a service, revenue increases.…

    • 358 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    "Price Elasticity of Demand" is the quantity demanded of a product when the price increases of a product. Most the time the number is negative since normally the demand does down on a product with increase of price. An example is gas prices, when a gas station raises their price of gas a lot of consumers search for the gas station with the cheapest gas. So if you are a gas station owner, if you have the lowest price you are going to get the business.…

    • 474 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Price elasticity of demand (PED) is the responsiveness of quantity demanded in relation to the price. Normally as price increases for an elastic good the quantity demanded will fall. This is affected by how many close substitutes there are for the good and if the good is a luxury good (jewelry) or a necessary good (food). If the price of a certain type of cheese increases, less will be demanded because there are many substitutes available such as other brands of cheese. The inelasticity of demand is applicable when referring to goods which have few if any substitutes, super bowl commercials are an example of an inelastic good. The network airing the super bowl has a fixed amount of commercials they are able to sell which results in a quota of commercials that needs to be filled. The longer the period before the night of the super bowl, the higher the price per commercial is. As super bowl night gets closer the price gets lower in order for the network to fill all available commercial slots. When this happens smaller companies who cannot afford the initial price will find themselves in the middle of a price war nearing the super bowl airing. When there is a fixed supply of a certain good the elasticity of the good is inelastic since no matter how large the demand for super bowl commercials the supply will never increase which results in a vertical supply curve. This type of elasticity of demand is said to be perfectly inelastic where PED = 0.…

    • 750 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Egt1 Task 3 Essay Example

    • 1105 Words
    • 5 Pages

    a) Elasticity of demand are circumstance at which a good or service varies according to prices. These circumstances measures consumers reaction and how they respond to the changes in price by changing the quantity demanded. (PE-of-D = (% Change in Quantity Demanded/% Change in Price)) – When the price for a number of units decreases from positive units pre-dollars to negative units per-dollars, the quantity of units sold increases.…

    • 1105 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Econ Cheat Sheet

    • 10692 Words
    • 43 Pages

    Like demand, supply also has varying degrees of responsiveness to price, which we refer to as price elasticity of supply, or the elasticity of supply. An inelastic…

    • 10692 Words
    • 43 Pages
    Good Essays
  • Good Essays

    When there is an increase in demand for a product or service and the price for the product or service goes down the product or service is considered elastic. An example is prescription medications. When a medication first becomes available to health care providers to prescribe to consumers the cost is significantly higher to the consumer in his or her co-pay and to the covering insurance company. As that medication is increasingly prescribed, the cost may come down because the supply and demand is more affordable for the pharmaceutical companies. Inelasticity is the opposite of elasticity and equal unresponsiveness. As in the example above, but in reverse action, a medication may be expensive to manufacture and may only help a small-targeted group of patients. As a result, the cost of the medication does not come down because there is not enough use to increase the supply and demand to help reduce the cost of manufacturing the…

    • 1034 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    Appendix B Essay Example

    • 552 Words
    • 3 Pages

    Define “Price Elasticity of Demand.” Give an example. In economics, price elasticity of demand is a measurement of the demand of a product or good to changes in the price of the products or goods, such as coffee and tea. Substitutes and income influence the elasticity of a good or product. Caffeine itself if price inelastic as it has no substitute and consumers will pay whatever price they have to for their morning coffee.…

    • 552 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Price elasticity of demand measures the percentage change in quantity demanded divided by the percentage change in price. Price elasticity is either inelastic or elastic.…

    • 361 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Measuring Price Elasticity

    • 1158 Words
    • 5 Pages

    Elasticity of demand would be important because when a tax is levied on a product whose demand is highly inelastic , tax revenue would be high…

    • 1158 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    To estimate the elasticity of demand, the percentage change in quantity demanded in response to the percentage change in price needed to be calculated.…

    • 960 Words
    • 4 Pages
    Satisfactory Essays