• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Price Elasticity and Income Elasticity of Demand

Extracts from this document...

Introduction

1. It is often observed that the price elasticity of demand for primary commodities is relatively low while that of manufactured goods is relatively high. Using diagrams, explain why. [10 marks] The PED of primary commodities (materials in a raw or unprocessed state) are generally low or that they are inelastic. This means that the % change in demand is lower than the % change in price or that demand won?t change by a large degree if price changes. This can be seen in figure 1.1. On the other hand, the PED of manufactured goods is relatively high or that they are elastic. This means that the % change in demand is higher that the % change in price. A change in price would result in a big change in demand which can be seen in figure 1.2. ...read more.

Middle

Lastly, wheat is consumed immediately ? in the short term. This means that wheat, or primary commodities, are inelastic because products that are consumed in a short amount of time tend to be more inelastic. Manufactured goods, on the other hand, such as laptops, are elastic in nature. Nowadays, laptops have a relatively high amount of close substitutes. For example, the gaming aspect of laptops could be replaced with gaming consoles. In this case, there is a choice for consumers to change what they buy. This means that if the price of laptops increase, consumers could switch to different, alternative products. Also, manufactured goods tend to be more of a luxury than a necessity. A huge increase in price will result in a significant decrease in demand. ...read more.

Conclusion

The decrease from P1 to P2 resulted in a much lower increase in demand (Q1 to Q2). In this case, total revenue fell. Equally, if price increases from P2 to P1, it will result in a much lower decrease of demand (Q2 to Q1) and total revenue would rise. If a product is price elastic, an increase of price would lead to a bigger percentage of decrease in demand ? causing total revenue to fall. Oppositely, if price decreased, demand would increase by a bigger percentage. This would increase total revenue. Figure 1.2 (Elastic = 1 < PED < Infinity) If price falls from P1 to P2, QD would increase by a bigger percentage from Q1 to Q2 and total revenue rises. Conversely, if price increases, it would lead to a fall in total revenue. A rise in price from P2 to P1 would a bigger decrease of demand. In this case, total revenue decreases. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. Peer reviewed

    Income and Price Elasticity of Demand

    3 star(s)

    = SUBSITUTE GOODS POSITIVE (+) = COMPLIMENTARY GOODS Examples For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be: .

  2. The Importance of the Canadian Airline Industry.

    Current Situation in Canada's Airline Industry The Canadian airline industry has experienced several problems throughout its history, but the worst undoubtedly have occurred in the last few years. A combination of internal and external factors have led Canada's largest airline, Air Canada, to file for bankruptcy protection.

  1. Discuss whether or not a firms revenue would increase, in response to price and ...

    changes in the price of the product, as such, if the price of the product falls, the firm can expect a disproportionate increase in consumption and, as such, an increase in total revenue.

  2. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    1984 William Low Scotland 1994 Quinnsworth, Stuarts and Crazy Prices stores Ireland 1997 T & S Stores(One Stop, Day&Nite) England 2002 21 Safeway/BP stores England 2005 After analysing Tesco and its financial status, I think it is important to analyse a negative aspect that I discussed earlier and incorporate with the ideas derived from information about Tesco.

  1. Discuss the usefulness to a business of a knowledge of price elasticity of demand ...

    If the firm finds that their product is a superior good, it is probably wise for them to attempt to advertise to high income customers and sell the product in high-end venues. However, like all metrics, income and price elasticities of demand have certain limitations.

  2. Explain, using the concept of income elasticity of demand how a fall in income ...

    As such, as a fall in incomes is essentially equivalent to an increase in prices, because both would cause an increase in the proportion of one?s income that must be spent on any given product, the fall in incomes causes the price elasticity of demand for all goods to increase,

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work