Summary of Price Elasticity

Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 2 (620 words) Published: September 15, 2011
Price Elasticity
Elasticity, in layman terms can be defined as the ability of an object to stretch or transform in shape, and return to its original form. This definition can be applied to many facets of life. In business we say that it is a measure of responsiveness; ‘measure’ being an expression that suggests numerical factors. In economics, elasticity is commonly measured in the price elasticity of demand, and the price elasticity of supply. Price elasticity of demand is the measure of how much consumers respond in their buying decisions to a change in price. In more technical terms, it gives the percentage change in quantity demanded in response to a once percent change in price. The formula is as follows = % change in quantity demanded. % Change in price This formula, from my understanding most likely brings about a negative result because of the law of demand, which explains that consumers tend to buy more of a product when price decreases. For example, In price elasticity of demand, when there is a product and for some reasons the suppliers decides to increase the price of this product by 20%; and consumers consequently respond by decreasing the quantity of their purchasing of it by 40%, using the equation, we see that the elasticity coefficient is -2. This negative result arises from an increase in price, which is usually a positive number, leads to a decrease in purchases -a negative number.  This is usually the case, however some determinants need to be taken into consideration. This is because they can affect the elasticity of demand. • Necessity - If consumers believe that this product is a necessity rather than a luxury, they would have to purchase it regardless of the price increase or change. This will make the change in quantity demanded less. E.g. of some necessities are gas, food, utilities. • Availability of close substitutes - If there is a...
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