Economics Commentary

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 3 (789 words) Published: December 1, 2012
Economics Internal Assessment
Writing a Commentary on News article
Task 1
Headline:
Pharmaceutical giant Paladol misjudge its market by raising the price on its best-selling headache relief tablet.

Price elasticity of demand (PED) is a measure of the responsiveness or sensitivity of consumers to a change in the price of a particular good. In this article, Paladol raised the price of its product, which was a mistake; there are a lot of other medicines for a headache and most of them would be cheaper which is what Paladol should have considered before raising their price.

PED= Percentage change in quantity demandedPercentage change in price=%∆QD%∆P

Cross-price elasticity of demand (XED) measures the responsiveness of consumers of a particular good to a change in the price of a related good, both complements and substitutes. In this article, however, we will be focusing more on the substitute goods.

XED= Percentage change in quantity of good APercentage change in price of good B=%∆QA%∆PB

Substitute goods are goods or products that one might easily use in place of another; because they’re so similar, an increase in the price of one may lead consumers to switch consumption to the substitute. The substitution effect (which underlies the law of demand) states that as the price of a good decreases, consumers switch from other goods to this good because its price is comparatively lower. As the price of Paladol increases we can see the substitute effect, people switching from Paladol which is expensive to Tylonel, for example; because its price is still the same which is cheaper than Paladol.

Demand is a curve showing the various amounts of a product consumers want and can purchase at different prices during a specific period of time. When Paladol increased its price for a particular headache relief medicine, consumers responded by decreasing their purchase of that expensive product, which decreased the quantity demanded; a movement up and left...
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