In general, businesses are aware of demand curves; however, it is rare that they actually know how to recognize those curves. In order to make sound business decisions, it is important to be able to recognize certain elements of a demand curve. For instance, if Apple raised its prices by five percent, what would happen to its revenues? The answer to this question depends on the response of Apple consumers. Will the consumer refrain from making purchases completely or just cut back on them? How a consumer responds to price changes is known as price elasticity.
The price elasticity of demand can be influenced by availability of substitutes, the level of necessity or luxury, amount of income required by the product, the time period considered and permanent or temporary price change. In regards to substitute or alternative products, the more substitute products there are, the bigger the elasticity. In reference to necessity or luxury, one must understand that luxury products have a tendency to have a greater elasticity than necessities. For some consumers, there are certain products that at the start have a minimal degree of necessity, but because they can be habit forming they turn into necessities. Additionally, products that consumers are required to spend more for are more inclined to have greater elasticity. When considering the time period, elasticity is more likely to be larger over a greater period of time for the reason that consumers have more time to modify their behavior toward price changes. With respect to permanent and temporary price change, a one-day sale will cause a different response than a permanent price reduction of the same degree.
The relationship of price elasticity of demand to microeconomics is consumer influence on prices. As previously mentioned, price elasticity is the consumer’s response to price change. Microeconomics looks at how the decisions and behaviors of consumers shape the supply and demand of goods and services. It is...
References: Economics Basics: Elasticity, (n.d.), Investopedia.com. Retrieved on September 5, 2010 from http://www.investopedia.com/university/economics/economics4.asp
Hubbard, R.G. & O’Brien, A.P., (2008). Microeconomics, Second Edition. Prentice Hall
Moffatt, Mike, (n.d), Price Elasticity of Demand. A Primer on the Price Elasticity of Demand. Retrieved on September 5, 2010 from http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
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