Elasticity of Demand

Topics: Price elasticity of demand, Supply and demand, Consumer theory Pages: 2 (1305 words) Published: October 26, 2014

Explain the concept of elasticity of demand
In the real world, prices of different products vary day by day, however, the effect it has on the demand is a concept that is very important to understand. When a consumer has an ability or willingness to buy a certain number of products at a given price, it is known as demand. Elasticity of demand is the measure of change in quantity demanded of a product when there is change in factors that effect demand. There are 3 main types of elasticity of demand; Price elasticity demand, Income elasticity of demand and Cross elasticity of demand. This is a concept applied in many markets and it helps many external beneficiaries whether or not to increase price on a certain product. This text will help explain the 3 types of elasticity of demand in depth and provide examples. The first type of elasticity of demand is PED, which stands for price elasticity of demand. It is the measure of change in quantity demanded when there is a change in price. When the quantity demanded of a product changes greatly compared to the change in price, this is known as an elastic demand. This is because there is a proportionately greater change in the quantity demanded than the price, hence in the formula for PED = % change in Qd / % change in Price, when PED > 1, it is an elastic product. For example, if a product’s price increases from $2000 to $2500 there is a change of 25%, and the quantity demanded changes from 5000 to 3000 units, then there is a change of -40% as the quantity demanded decreases. However, the negative is unaccounted for and absolute values are used hence giving the PED as a positive value always. From this we can see that the value of PED would be 1.6 making the product elastic. However, if the 0<PED<1, then it would be inelastic as the change in price is greater then the change in quantity. If PED = 1 then the elasticity would be unitary and if it were 0 then it would be perfectly inelastic. It is only brands...
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