Miss Jessie C
Short Paper: Demand Elasticity
Jessie Carrollo
Centenary College of New Jersey
Price elasticity is important because it helps companies to determine how much the price of a good or service can fluctuate before it affects demand. A product or service is determined to be inelastic when a change in price will not dramatically affect the consumer’s demand on that product or service. Inelasticity is generally determined when a good’s PED is less than one on the demand scale. An elastic good is determined by a PED of 1 or greater indicating changes in price have a relativity large effect on the quantity demanded. This simple illustration more simply demonstrates price elasticity.
Factors such as the price of the item or service, availability of alternative goods, amount of time being measured, consumer income and whether the item or service is considered to be a necessity or a luxury determine price elasticity of demand. Considering all these factors revenue can be maximized when the price of a good is set so that the PED is exactly one.
An example of a perfectly inelastic good would be something like insulin. For someone with diabetes insulin is a necessary part of life. Let’s start by assuming a bottle of insulin was going for $5 a vial and the consumer needed 100 vials a week to survive. Should the price drop to $1 a bottle the consumer would still only by the same 100 vials necessary for their condition. Now assume the price is raised (within reason) to $100 per vial. The end result is that the consumer, although it may be a strain on their budget will still need to buy the same number of vials to survive. The formula would look as such:
Ep = % change in Q = 0 % change in P = (any price whether $5 a bottle or $100)
This example indicates price inelasticity because no matter what the change in percentage of price becomes it does not have an
Jessie Carrollo
Centenary College of New Jersey
Price elasticity is important because it helps companies to determine how much the price of a good or service can fluctuate before it affects demand. A product or service is determined to be inelastic when a change in price will not dramatically affect the consumer’s demand on that product or service. Inelasticity is generally determined when a good’s PED is less than one on the demand scale. An elastic good is determined by a PED of 1 or greater indicating changes in price have a relativity large effect on the quantity demanded. This simple illustration more simply demonstrates price elasticity.
Factors such as the price of the item or service, availability of alternative goods, amount of time being measured, consumer income and whether the item or service is considered to be a necessity or a luxury determine price elasticity of demand. Considering all these factors revenue can be maximized when the price of a good is set so that the PED is exactly one.
An example of a perfectly inelastic good would be something like insulin. For someone with diabetes insulin is a necessary part of life. Let’s start by assuming a bottle of insulin was going for $5 a vial and the consumer needed 100 vials a week to survive. Should the price drop to $1 a bottle the consumer would still only by the same 100 vials necessary for their condition. Now assume the price is raised (within reason) to $100 per vial. The end result is that the consumer, although it may be a strain on their budget will still need to buy the same number of vials to survive. The formula would look as such:
Ep = % change in Q = 0 % change in P = (any price whether $5 a bottle or $100)
This example indicates price inelasticity because no matter what the change in percentage of price becomes it does not have an