Elasticity of Demand

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 8 (3010 words) Published: May 31, 2013
Elasticity of Demand|

Elasticity of demand2
Elasticity coefficients3
The differences between the three terms4
More or less elastic5
Perfectly inelastic and perfectly elastic demand8
Graphs for Elasticity of Demand9

Elasticity of demand
Elasticity of demand is the measurement of change in the price of a product. It measures the percentage change in the quantity demanded caused by a percent price. There are three areas that need to be explored when inquiring about elasticity of demand. First, when the price of merchandise is lowered, how much more merchandise would sell. Second, if you raise the price of the merchandise, how much less merchandise would sell. Third, the merchandise is limited so will people scramble to obtain the merchandise. Elasticity of demand measures the extent of movement along the demand curve. Cross-price elasticity of demand measures the percentage change for a particular item caused by the price change of another item. These items can be complements or substitutes. The change in price can cause the demand curve to shift and reflect the change in demand for the item. Cross price elasticity measures how far and which direction the demand curve will shift. A positive cross-elasticity means the items are substitute goods. If two items are substitutes, consumers will purchase more of one item when the price of the substitutes increases. If the two items are complements, the price will rise in one item and cause the demand for both items price to fall. The cross-price elasticity of demand for a substitute item will always be positive because the demand for that item will increase in price if the price for a similar item increases and everything else remains the same. Complements will be negative if the price of an item increases and everything else remains the same, the quantity demanded for that item will drop because the consumer will purchase fewer items. Income elasticity of demand measures the rate of response of quantity demand due to the fluctuation on a consumer’s income. The fluctuation in income could be due to a raise or change in job lowering income. Income elasticity of demand is used to see how sensitive the demand for a good is to an income change. A lower income is associated with inferior goods while having a higher income is associated with normal goods. An increase in income leads to a fall in the demand and could lead to substitutes that are more luxurious. As your income increases, you have a tendency to buy better quality goods which are referred to as normal goods. As a college student you only buy pizza and soft drinks because that is what you can afford, but when you graduate and become employed you may go out to lunch or dinner and order a steak dinner. Your quality of life improves. Inferior goods are consumed more by consumers with a lower income because they cannot afford more expensive or wholesome merchandise. The drop in inferior goods usually leads to an increase in normal goods as income rises. Elasticity coefficients

The elasticity coefficient is a number that indicates the percentage change that will occur in one variable when another variable changes one percent. Coefficient for elasticity of demand equals the percentage change in quantity demanded divided by the change in price. If the demand is elastic the coefficient elasticity of demand is greater than one. Coefficient of inelasticity demand occurs when the percentage change in quantity demanded is less than the percentage change in price. If the demand is inelastic the coefficient elasticity of demand is less than one. When the percentage change in quantity is the same as the percentage change in price, the demand is unit elastic. A change in price will result in an identical change in demand. A unit elastic demand curve will have a slope of one. Therefore, if the demand is unit elastic the coefficient is elasticity of demand...

References: Brue, S. L., Flynn, S. & McConnell, C.R. (2012). Economics (19e.). New York, NY:
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