Introduction to Microeconomics/ECO102
March 25, 2013
Price Elasticity of Demand
This paper will discuss about price elasticity of demand and factors that affect price elasticity of demand. Elasticity can be described as a measure of the sensitivity of demand for goods or merchandise to changes in price. Price elasticity determines how much of an impact a change in goods or services price will have on the consumers' willingness to purchase that particular item in market. If the price of goods is cheap, is most likely that consumers will purchase more items of those particular goods or product. Determinants of the price elasticity of demand express how responsive the quantity demanded of a good or service is to a change in its price.However, it determines how easily people could switch from one product to another, and determines how elastic or inelastic a good is in the market with consumers purchase. Factors that affect price elasticity are Availabilities of substitutes, Degree of necessity, Proportion of income required by the item, Time period considered, Temporary price change and Price points. Availabilities of Substitutes The demand for a product or goods will be very elastic if some other s products can be used for it. A small rise in the price of such a product will induce consumers to use its substitutes. Consumers’ always prefer to purchase cheaper products in the market, but tend to other goods as substitutes if cheaper in the market. For example gas, kerosene oil, coal etc. will be used more as fuel if the price of wood increases. However, the demand of such commodities is inelastic which have no substitutes such as salt. (Upadhyaya )
Degree of Necessity With degree of necessity, the demand for necessaries is inelastic and that for comforts and luxuries of life elastic. This is so because certain goods or products which are essential to life will be demanded at any price. However, goods meant for luxuries and comforts can be dispensed with easily if they appear to be costly in the market.
Proportion of Income Required by the Item Products that consume a large portion of consumers’ income tend to have greater elasticity. If a small proportion of total payment is spent on a product or goods, its demand will be inelastic such as demand for salt. In other words, if a major portion of total expenditure is spent on a product, its demand will be more or highly elastic such as demand for luxuries products in the market.
Time Period Considered Consumers’ tend to have more time because elasticity is greater over long run. In the short period, if price of a product like petrol is increased, its demand will not fall immediately and hence it would be inelastic or less elastic. However, if period is longer alternative sources of energy can be developed and hence demand would be elastic.
Temporary Price Change Permanent price decrease elicits a different in a day sale. Usually the demand for such products whose use can be delayed for some time is elastic. For example, the demand for V.C.R. is elastic because its use can be delayed for some time if its price goes up, but the demand for rice and wheat is inelastic because their use cannot be delayed when their prices increase in the market. ( Upadhyaya )
Price Points Approximately, the…