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Price Elasticity of Demand

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Introduction

PED Price elasticity of demand (PED) is the responsiveness of quantity demanded to the changes in the price given. The main factors that affect PED of good are the number and closeness of substitutes, necessity of the product and how widely the product is defined, and also time. One of the most important determinants of PED is the number and closeness of substitutes; it can briefly be explained as when there are more substitutes for a product, the demand will become more elastic. Also when the substitute available is closer, the demand would be more elastic too. For example, there are many different brands of sports wear available on the market and if one of the brand increases the price of their product, this will lead customers to a change in demand to another brand. ...read more.

Middle

However when Solar energy will be introduced in few years, the demand of the electricity will slowly become elastic. So far the PED of oil is very inelastic since there aren't any substitutes available and also it is scarce. In general consumers would have no choice to switch from oil to another product, mainly because oil is used everywhere. Recently the transportation industry in England has had to increase its price due to oil. The rising price of oil has forced the airline, bus, subway companies to increase their price frustrating them and the consumers. Oil is a necessity product so therefore transportation industries can't do anything with it; the circumstance also affects the consumers too and the price increase on oil would not change the demand of the transportation/oil, it will still stay inelastic since there aren't any alternatives for oil. ...read more.

Conclusion

the demand would decrease if we relate to the shop situation. When consumers have solutions avoiding buying products related to plastic than the demand would decrease shifting the demand curve to the left, and become less inelastic. When the price of the plastic/oil is decreased, the demand could rise again; making the curve find a new equilibrium. In general the demand for the oil tends to be inelastic, and it will remain like this until there is a substitute. The demand will become elastic when inventions like hydro or solar energy on transportation/ daily life is used. However these inventions would take quite a lot of time so therefore demand for oil would remain on its position for a long period of time. It is predicted that since the natural resources (including oil) are decreasing every year, they will become scarce which obviously will cause an increase in price. So the best solution to avoid oil consumption is 'new inventions' that will become substitute to oil. ?? ?? ?? ?? 4/3/08 ...read more.

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