Price/Income Elasticity of Demand

Topics: Supply and demand, Consumer theory, Price elasticity of demand Pages: 2 (642 words) Published: June 23, 2008
In the ever-changing economy, staying competitive and increasing revenue is a constant battle. Understanding the economics is a main key in remaining or becoming successful in the market. Many tools aid in making economic decisions such as whether to increase or decrease price and understanding income versus demand. The following information will provide insight on using the price elasticity of demand to determine whether to increase or decrease price and using the concept of income elasticity of demand to determine demand expectations. The price elasticity of demand “measures the rate of response of quantity demanded due to a price change” (About.com, 2008). Several factors influence the price elasticity of demand including •Availability of substitutes

Degree of necessity of luxury
Proportion of income required by the item
Time/period considered
Permanent or temporary price changes
Price points.
The price elasticity of demand is a unit-less number calculated by dividing the proportionate change in quantity demanded by the proportionate change in price. So how can this number be used to decide whether to increase or decrease price while still increasing a company’s revenue? It all depends on the demand curve. Once the price elasticity of demand is calculated, it can be placed on the demand curve and compared to different ranges of values to determine what would happen with an increase or decrease in price. For example, if elasticity is >1 (infinite elasticity), the demand curve would be nearly horizontal and small changes in price would have a large impact on quantity demanded. Should the elasticity be
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