Elasticity of Demand

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 6 (1910 words) Published: August 31, 2013
Elasticity of Demand
Sione H. Kinikini
Western Governor University
Elasticity of Demand
Elasticity can be thought of as a measurement of responsiveness. (Moffatt, About.com Economics: A Beginner's Guide to Elasticity, 2013). In the world of economists, elasticity is used to help measure the rate of change for quantity demand caused by change in price, also known as Price Elasticity of Demand (Khan Academy, 2013) (Moffatt, About.com Economics: Price Elasticity of Demand, 2013). Price of elasticity of demand is measured by percentage change in quantity demanded divided by the percentage change in price (Moffatt, About.com Economics: Price Elasticity of Demand, 2013). This entails that the percentage change in quantity demand can be affected by the percentage change in price for a good. These changes can be measured by how sensitive the quantity demand is affected by the change of price (Moffatt, About.com Economics: Price Elasticity of Demand, 2013). Dependent on the level of sensitivity, the price elasticity of demand can be defined in three categories: price elastic, unit elastic, or price inelastic. Price elastic is when the quantity demand is highly sensitive to change in price of a good (Moffatt, About.com Economics: Price Elasticity of Demand, 2013). For example, the price of the good decreased by five percent and the demand of the good increased by 25 percent, therefore, the quantity of demand is sensitive to change in price. Unit demand occurs when the quantity demand and price changes simultaneously and there is no changes in the revenues (Amadeo, 2013) (Business Dictionary, 2013). For example, the price of a good is increased by one dollar, but the demand for the same good is decreased by one unit (Business Dictionary, 2013). Inelastic demand occurs when percentage change in quantity demand does not change vary as much as the price does, or the quantity demand is not sensitive to the change in price (Amadeo, 2013). Another type of elasticity is cross-price elasticity. Similar to price elasticity of demand, cross-price elasticity is a measure of responsiveness. It measures “the rate of response of quantity demanded of one good, due to a price of another good (Moffatt, About.com: Cross-Price Elasticity of Demand, 2013).” Therefore, the quantity demand for the one good can be affected by the price of another good. To measure the cross-price elasticity is similar to price elasticity of demand. You will need to find the percentage change in quantity demand for Good A, then find the percentage change in price for Good B, then divide the percentage change in quantity demand for Good A by the percentage change in price for Good B (Moffatt, About.com: Cross-Price Elasticity of Demand, 2013). Cross-price elasticity can be affected by the relationship of the goods. If the goods complement each other like E-books and E-readers, then the cross-price elasticity from a numerical value will be a negative relationship (KhanAcademy, 2013 ). The percentage change in price for E-readers will affect the percentage change for the quantity demand for E-books. For example, if the price of the E-reader decreases by 10 percent, then the E-books will most likely increase causing a negative relationship between the two complementary goods. An increase for the quantity demand for the E-books may occur because more individuals are buying more E-readers and due to the decrease in price they now have a little bit extra money to buy E-books (KhanAcademy, 2013 ). In relation to cross-price elasticity, the relationship between the two goods may have a numerical positive relationship (Moffatt, About.com: Cross-Price Elasticity of Demand, 2013) (KhanAcademy, 2013 ). When the relationships between two goods are positive that indicates that the two goods are substitutes of each other (KhanAcademy, 2013 ). Substitutes of goods can be thought of two different companies that distribute the exact same good. For example, T-mobile...

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