1st November 2012
Examine whether the price elasticity of demand for rice is likely to be elastic or inelastic.
Price elasticity of demand is the measure of how much of the quantity demanded changes in regards to a change in price. The PED is measured by the following formula: % Change in Quantity Demanded of the product/% Change in Price. If the PED is less than 1, the good is inelastic- indicating that there is a smaller change in quantity demand compared to the price change. When the PED is greater than 1, the good is elastic- meaning the quantity demanded will change significantly compared to a small price change. The price elasticity for rice could vary throughout several regions- but it can be argued that it is mainly inelastic because of the necessity of the product and the value the product holds in many households. However, in many regions, rice has proved to be elastic because of the number of close substitutes it has. The percentage change in price is greater than the percentage change in quantity demanded The percentage change in price is greater than the percentage change in quantity demanded
To begin with, the price elasticity of demand for rice can be deemed inelastic. Clearly, various households consume rice on a regular basis. Research shows that rice is a staple good, or a main element in one’s diet, in “34 of the world’s countries.” With such a culture and mindset, households would unwilling to alter their demand for rice. Since rice is so commonly consumed, it is considered a necessity amongst households. Families of East-Asian descent, especially, are the largest consumers of rice- and eat rice in every meal. For instance, the price of a rice pack could be increased to $2.50 from $2.00; the change in price will be 25%. For a necessity product, the low reluctance of changing to another product would result in a smaller percentage change in demand- forcing the PED to be less than 1 and for rice to be inelastic. Although the...