Synopsis of Price Elasticity of Demand on Automobile Industry

Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 2 (846 words) Published: August 21, 2008
One definition of elasticity is what happens to consumer demand for a good when prices increase. As the price of a good rises, consumers will usually demand a lower quantity of that good, perhaps by consuming less, substituting other goods, and so on and the demand of complementary product will also be less. The greater the extent to which demand falls as price rises, the greater the price elasticity of demand. Conversely, as the price of a good falls, consumers will usually demand a greater quantity of that good, by consuming more, the demand of complementary will also rise, dropping substitutes, and so forth. However, there may be some goods that consumers require, cannot consume less of, and cannot find substitutes for even if prices rise (for example, certain prescription drugs). For such goods, the price elasticity of demand might be considered inelastic. A number of factors determine the elasticity:

Substitutes product : The more substitutes, the higher the elasticity, as people can easily switch from one good to another if a minor price change is made Percentage of income: The higher the percentage that the product's price is of the consumers income, the higher the elasticity, as people will be careful with purchasing the good because of its cost Necessity: The more necessary a good is, the lower the elasticity, as people will buy it no matter the price, such as insulin Time: The longer a price change holds, the higher the elasticity, as more and more people will stop demanding the good (i.e. if you go to the supermarket and find that blueberries have doubled in price, you'll buy it because you need it this time, but next time you won't, unless the price drops back down again) Breadth of definition: The broader the definition, the lower the elasticity. For example, Company X's fried dumplings will have a relatively high elasticity, where as food in general will have an extremely low elasticity In this project, we will study the cross-price...
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