Economics and Global Business
Economics and Global Business
Elasticity of demand is describes as the degree of percentage change in demand for a good or service due to variation in price. Elasticity measurements can be expressed by three types of demand; inelastic demand, unit elastic demand, or relatively elastic demand. To determine the percentage of change in demand for a product or service the price elasticity equation and coefficient are used. The coefficient Ed is defined as “the percentage change in quantity demanded of product divided by the percentage change in price of product X” (McConnell, Brue, Flynn, 2012, pg. 76) The three expressions of Ed are Elastic, Inelastic, and Unit Elasticity.
Elastic demand occurs “if a specific percentage change in price results in a larger percentage change in quantity demanded” (McConnell, Brue, Flynn, 2012, pg. 77). For a product with inelastic demand Ed < 1. An example of elastic demand is when there is a 2% decrease in the price of chocolate that results in a 6% increase in quantity. Ed= .06/.02 = 3 Inelastic demand occurs “if a specific percentage change in price produces a smaller percentage change in quantity demanded.”(McConnell, Brue, Flynn, 2012, pg. 77) For products with inelastic demand Ed 0 .Inferior goods are goods that yield a negative income elasticity, Ei < 0. As consumer incomes increase, demand and purchases of these foods decrease. Examples of inferior goods are bus tickets, consignment clothing, and retreaded tires to list a few.
Demand of a product will be elastic when there is a higher number of substitute available. This happens because consumers can easily swap one product for the other based on price. An example can be the purchase of soda. A consumer can go to the store to buy Pepsi but arrive and find a sale on Coke and buy Coke instead. The variety of soda a consumer can chose, makes the demand for Pepsi highly elastic. The same rule applies for inelastic demand of a product. If there is a limited number of substitute goods available the product or service is highly inelastic. An example would be medical procedures or surgery. The alternative to surgery are very few, making medical procedures or surgery inelastic.
The proportion of Income devoted to a good or service effects the elasticity of demand for that good or service. For goods that are of a higher proportion of income, a 15% increase in price would make the good highly elastic. But for goods that are of a lower proportion of income, a 15% increase in price would only slightly change the demand, making them lower in elasticity. An example would be a car priced at $13,000. If there is an increase by 15% the car now costs $14,950. This increase in price requires more of the consumer’s income making them highly elastic. Another example of how proportion of income devoted to a good effects elasticity of demand, is a pair shoes that cost $20.00. If there is a 15% price increase on the shoes, they now cost $23.00. The increase in the price of the shoes requires about the same proportion of income that the original price required. The lack of major proportional change to income makes the shoes elastic.
Time is a factor that effects consumers demand elasticity of a product. “Short-run” demand for a product is often more inelastic than “long-run” demand since consumer have less time to find an alternative and normally don’t feel the effects of a price increase until “long-run.” An example would be an increase in the price of salmon. “Short-run” demand of Salmon is more inelastic since the effect if the price increase hasn’t been felt drastically by consumers. But, in the “long-run” demand for salmon will decrease making it more elastic as consumers find alternative to salmon.
1) Elastic demand range occurs when total revenue can be increased by decreasing price. The range for elastic demand on the graph is between $80 and $50. Total revenue increases as the price decrease. 2). Inelastic demand range occurs when total revenue can be increased by increasing price. The range for inelastic demand on the graph is between $40 and $0. Total revenue is decreasing as the price decreases. 3). Unit elastic range occurs when a percentage change in price results in the exact same percentage change in quantity. When the price changes it does not affect total revenue on the graph. The unit elastic range for the given graph is $50-$40.
McConnell, Campbell R., Stanley L. Brue, and Sean Masaki Flynn. “Elasticity.” Economics: principles, problems, and policies. 19th ed. New York: McGraw-Hill/Irwin, 2012. 76-77. Print.