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Price Elasticity of Demand.

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Introduction

Price Elasticity of Demand Eco 203- 27 Victoria P. Panna October 13, 2003 Principals of Microeconomics Table of Contents I. Overview II. Changes in Price and Quantity Demanded i. Consumer Responsiveness to Price Changes ii. Calculating the Coefficient of Price Elasticity iii. Elastic Versus Inelastic Demand iv. The Difference between Price Elasticity and Slope v. Point Elasticity III. Determinants of Price Elasticity of Demand vi. Available Substitutes vii. Cost of the Good Relative to Total Income viii. Time and the Availability of Substitutes ix. Luxuries Versus Necessities IV. Price Elasticity and Total Revenue x. Price Discrimination V. Price Elasticity and the Incidence of a Tax VI. Summary VII. Definitions VIII. Appendex IX. Works Cited Overview Three important characteristics of determining demand are the relationships between market price, quantity, and demand and consumer expenditure. To predict consumer behavior, economists use well-defined techniques evaluating the sensitivity of consumers to changes in price. The most commonly used measure of consumers' sensitivity to price is known as price elasticity of demand. Price elasticity of demand is the change in quantity demanded of a good or service and a change in price. The relative response of a change in quantity demanded to a relative change in price. More specifically the price elasticity of demand can be defined as the percentage change in quantity demanded due to a percentage change in demand price. Price elasticity can be used to determine how much a company should increase / decrease prices to maximize profits. There are many different variables that account for price elasticity of demand, including change in price, consumer demand, size of expenditure, and the law of demand, among other things. As you read on, you will become familiar with these terms and how they affect price elasticity of demand. Changes in Price and Quantity Demanded What is the general relationship between price and the quantity of demanded goods? ...read more.

Middle

There are may other goods in which the price elasticity of demand is relatively high. There are a number of close substitutes in the pizza market- Papa John's, Domino's, Little Caesar's, and Pizza Hut, to name a few. Consumers are sensitive to a change in the price of a given product in this market, due to the wide variety of available substitutes. The inelastic demand category includes such goods as coffee and cigarettes. Consumers are insensitive to price changes for those goods because there are very few close substitutes. Coffee drinkers drink coffee because of the caffeine content and flavor, and there are a few good substitutes. Cigarette smokers are extremely insensitive to cigarette price changes because there are no good alternatives. The availability of substitutes also depend on the definition of the product or service category. Generally, price elasticity of demand is greater for the narrower, specifically defined categories of goods and services. For example, the demand for salt is very inelastic because is has very few substitutes. The demand for Morton salt is less inelastic because other brands of salt are available. Even less inelastic is the demand for Morton salt in a specific store. Alternatives include Morton salt sold at other stores. Cost of the Good Relative to Total Income Another influence on price elasticity of demand is the size of the expenditure on a good relative to the consumer's total income. For example, the price of milk is relatively low and price is insignificant to most family or individual incomes. Even if the price were to double, it would still have almost on impact on the impact of quantities consumed. On the other hand, if the price of a restaurant meal were to double, which would take up more of the household's income, then it would lead to a percentage reduction in the quantity demanded. This proves that there is a positive relationship between the cost of a good relative to total income and the price elasticity of demand. ...read more.

Conclusion

Price elasticity of demand is part of many consumers' day to day routines. When you see a change in price of gas, a restaurant meal, or milk, just know that you are contributing to the economy and the price elasticity of demand. Definitions * Arc Elasticity: The price elasticity if demand between any two points in a demand curve. * Coefficient of Elasticity: The ratio of the percentage change in quantity demanded to the percentage change in price. * Elastic Demand: Quantity demanded is relatively responsive to a change in price. The coefficient of elasticity is greater than one. * Inelastic Demand: Quantity demanded is relatively responsive to a change in price. The coefficient of elasticity is greater than zero, but less than one. * Law of Demand: The relationship between the price of a good and the quantity demanded. * Perfectly Elastic Demand: The percentage change in quantity demanded is infinite for a price decrease, regardless of the value of the percentage change in price. The coefficient of elastic equals infinity. * Perfectly Inelastic Demand: The percentage change in quantity demanded is zero, regardless of the value of the percentage change in price. The coefficient of elasticity equals zero. * Point Elasticity of Demand: Price elasticity at a single point on a demand curve. * Price (P): the amount of money given or set as consideration for the sale goods. * Price Discrimination: the practice of charging different prices to different consumers of the same good or service. * Price Elasticity of Demand: The relationship between a change in quantity demanded of a good or service and a change in price. * Quantity (Q): Total amount or number of goods. * Total Revenue: The product of a good's market price and the quantity of the goods purchased. * Unitary Elastic Demand: The percentage change in quantity demanded is exactly equal to the percentage change in price. The coefficient of elasticity equals one. ...read more.

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