Elasticity of Demand

Topics: Supply and demand, Tea, Price elasticity of demand Pages: 2 (662 words) Published: May 20, 2013
Elasticity of demand, also known as price elasticity refers to the way people react to price changes. The greater the demand elasticity, the more sensitive people are to changes in pricing. The degree of demand of a product or service depends on its pricing. If the product is priced lower, it will experience high demand while a higher priced product may see lower demand. Generally, products such as cars, appliances, cosmetics and other non-essential items show elasticity of demand while food, medicine, clothing and other necessities display inelasticity of demand. Our survey consist various types of green teas which are Dilmah, Lipton and Ten Ren. All three products that we surveyed contained the same amount of tea bags which is 20 tea bags. Dilmah was priced at RM8.00 which comes up to RM0.40 cents a bag and Ten Ren was priced at RM8.79 which comes up to RM0.44 cents a bag while Lipton was priced at RM18.40 making it RM0.92 cents per bag. From this information itself, we can say that Dilmah and Ten Ren are similarly priced while Lipton is priced considerably high compared to Dilmah or Ten Ren. According to the concept of price elasticity of demand, a 10% rise in price will result in a more than 10% drop in quantity demanded if a product shows elasticity of demand. If a product show inelasticity of demand, a 10% rise in price will result in a less than 10% drop in quantity demanded. At the price range of RM8.00 to RM8.79, we assume that Dilmah and Ten Ren are products that show inelasticity of demand while Lipton priced much higher at RM18.40 shows elasticity of demand. We argue that this is due to the nature of the good where Dilmah and Ten Ren are considered necessities while Lipton is considered a luxury because they are aim towards different markets. Dilmah, Ten Ren and Lipton are supposed to be similarly priced because all three brands are Green Tea and carry two bags each but the higher pricing of Lipton suggests otherwise. Substitutes are supposed to be...
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