Classification of Price Elasticity of Demand
Classification of Price Elasticity of Demand
1. Price Elastic Demand (% ΔQd > % ΔP) ϵ > 1
If the value of price elasticity coefficient is greater than one in absolute value. This means that a small change in price results to a greater change in quantity demanded.
Goods which are elastic tend to have some or all of the following characteristics:
They are luxury goods
They are expensive and a big % of income e.g. sports cars and holidays
Goods with many substitutes and a very competitive market. E.g. if Simsbury’s put up the price of its bread there are many alternatives, so people would be price sensitive
Bought frequently
Graph:
We say a good is price elastic when an increase in prices causes a bigger % fall in demand. e.g. if price falls 20% and demand increases 80%, the Price Elasticity of Demand = -4.0
References:
Health Economics in the Philippine Context by Bon Kristoffer G. Gabay, Roberto M. Remotin, Jr., & Edgar Allan M. Uy; Rex Book Store, Inc.; July 2011 http://www.economicshelp.org/microessays/equilibrium/price-elasticity-demand.html http://www.economicshelp.org/blog/7019/economics/examples-of-elasticity/
Examples:
Heinz soup. These days there are many alternatives to Heinz soup. If price rises, people will switch to less expensive varieties.
Shell petrol. We say that petrol is overall inelastic. But, if an individual petrol station increases price, people will buy from other petrol stations. The only exception is if a petrol station has a local monopoly – e.g. at service station on the motorway there is a captive audience. But, in a city centre with many alternatives, people will have an elastic demand.
Tesco bread. Tesco bread will be highly price elastic because there are many better alternatives. If the price of Tesco bread rises, consumers will switch to alternatives.
Daily Express. If the Daily express increases in price, there are similar newspapers people will switch to. For example, the Daily Mail or Daily Mirror. If it was a newspaper
1. Price Elastic Demand (% ΔQd > % ΔP) ϵ > 1
If the value of price elasticity coefficient is greater than one in absolute value. This means that a small change in price results to a greater change in quantity demanded.
Goods which are elastic tend to have some or all of the following characteristics:
They are luxury goods
They are expensive and a big % of income e.g. sports cars and holidays
Goods with many substitutes and a very competitive market. E.g. if Simsbury’s put up the price of its bread there are many alternatives, so people would be price sensitive
Bought frequently
Graph:
We say a good is price elastic when an increase in prices causes a bigger % fall in demand. e.g. if price falls 20% and demand increases 80%, the Price Elasticity of Demand = -4.0
References:
Health Economics in the Philippine Context by Bon Kristoffer G. Gabay, Roberto M. Remotin, Jr., & Edgar Allan M. Uy; Rex Book Store, Inc.; July 2011 http://www.economicshelp.org/microessays/equilibrium/price-elasticity-demand.html http://www.economicshelp.org/blog/7019/economics/examples-of-elasticity/
Examples:
Heinz soup. These days there are many alternatives to Heinz soup. If price rises, people will switch to less expensive varieties.
Shell petrol. We say that petrol is overall inelastic. But, if an individual petrol station increases price, people will buy from other petrol stations. The only exception is if a petrol station has a local monopoly – e.g. at service station on the motorway there is a captive audience. But, in a city centre with many alternatives, people will have an elastic demand.
Tesco bread. Tesco bread will be highly price elastic because there are many better alternatives. If the price of Tesco bread rises, consumers will switch to alternatives.
Daily Express. If the Daily express increases in price, there are similar newspapers people will switch to. For example, the Daily Mail or Daily Mirror. If it was a newspaper