Elasticity of demand is a measure of responsiveness to a price change of a good or service. When demand is elastic, the percentage of a price change of a product will result in a larger percentage of quantity demanded (McConnell, p 77). It basically means reducing the price of a good service will result in a greater quantity demanded and an increase in revenue for the seller. When demand is inelastic, a change in price will result in a reduction of quantity demanded, which will then lead to a revenue decrease (McConnell, p 77). To demonstrate elastic and inelastic demand results, Company A sells 100 pens at $1.00 a piece each day, making their revenue $100.00. Company A …show more content…
Often, it is dependant on how much of the household budget is devoted to that good or service. Mobile phone service is an excellent example of a service that will most likely have a large amount of a household budget dedicated to it. A change in price in the cell phone service will most likely result in that family making a decision to change to a cheaper service, since that will have a large impact on their budget. On the other hand, that same household may purchase light bulbs each month. The amount of money dedicated to the purchase of light bulbs is so small, that a price increase will not likely affect the budget, therefore the family will not likely make a decision to change to a cheaper bulb.
The concept of time when discussing demand is important. When a consumer has a large amount of time to decide on the purchase of a good or service, the elasticity is positive. Conversely, if there is little time, the elasticity is said to be negative. According to McConnell, and excellent example of this is gasoline for automobiles. Gasoline prices change daily and more often than not, prices rise. A family, who owns a car and is dependent on that car for work, etc, will not likely stop buying gas in the sort-term, because it is crucial to their everyday living. However, that family over a long period of time may decide to find alternate means of travel, decreasing