PRICE ELASTICITY OF DEMAND

Factors That Affect the Value of Price Elasticity of Demand

Factors That Affect the Value of Price Elasticity of Demand

Introduction

The elasticity of demand, also known as price elasticity of demand is a concept in economics is used to measure the sensitivity or responsiveness of a product to a change in its price. Economists use the concept of price elasticity to determine the sensitivity of consumers to changes in product prices. If small changes in price lead to significant changes in the quantity of purchased products, this demand is called elastic or relatively simple elastic. In principle, the elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price.

Discussion

There are many reasons for the changes of supply and demand for the product. Supply agreement with the role of sellers or producers product. The makes provision changes: price, quantity, technology, government, and expectations. Price and quantity of the product directly affects the profits. If, the price of a commodity rises, the amount of revenue increase also leads to increase quantity provided. If the price, of goods decreases, this leads to a small amount of revenue and provides quantity also reduced (Gruenewald, 2006, p96). Changes in price and quantity affect the market equilibrium in three directions. "In the equilibrium price, quantity of goods that buyers are willing and able to buy just the remnants of sellers is willing and able to sell" (Mankiw, 2007, p4). There are three ways to determine changes in the balance. "First, decide whether the event shifts the supply curve, demand curve, and in some cases, both" (Mankiw, 2007, p5). "Second, decide if the curve shifts to the right or left" (Mankiw, 2007, p3). This means that when the curve is shifted to the right, and then more goods and demand for products has increased. If the curve shifts to the left, and then there are fewer goods and demand for products has decreased. This is because levels of price and quantity demanded affect the percentage changes. For a given change in price, percentage change is small at a high price and large at a low price. Similarly, for a given change in quantity demanded, the percentage change is small for a large and great for a small amount. Thus, for a given change in price, the lower the initial price, the greater the percentage change in price, the lower the percentage change in quantity demanded and the lower the elasticity.

An example of this determination is whether the supply of vitamins increased after the new supply curve will shift to the right, if the reduction in supply after the new supply curve to move to the left. If the demand, for vitamins will increase the demand curve, then turn right again, if the fall in demand after the new demand curve will shift to the left. It is possible that the two lines shift to the right or left, as soon as new curves are defined below, a ...