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# The point of this essay is to clarify and point up the different concepts of elasticity of demand passing through examples and diagrams.

Extracts from this document...

Introduction

The point of this essay is to clarify and point up the different concepts of elasticity of demand passing through examples and diagrams. In every market economy, when the price of a good rises the quantity demanded will fall and vise versa. Conversely, in most cases this is not enough. We would also like to know how much will the quantity demanded rise or fall. In other words, we will want to know how responsive demand is to a rise in price. This responsiveness of quantity demanded to a change in price is what we call price elasticity of demand. Therefore, what we want to compare is the size of the change in quantity demanded with the size in the change in price. Because of the different units that price and quantity are measured in, the only approach we can do this is to use percentage or proportionate changes. From this derives the "formula of the price elasticity of demand (PED)" for a product, which is the percentage (or proportionate) change in quantity demanded divided by the percentage (or proportionate) change in price. ...read more.

Middle

= ?. Diagrammatically, this is shown by a horizontal straight line. At any price above P1 in the following figure, demand is zero. On the other hand, at P1, or any other price below, demand is 'indefinitely' large. P a b P1 D 0 Q1 Q2 Unlikely though the above demand curve may seem, it is common for an individual producer. An example of a good that has high elasticity of demand, almost indefinite, is ballpoint pens from the university bookshop or from the newsagent's shop close by. If the two shops offer pens for the same price, some people buy from the one and some from the other. Nevertheless, if the bookshop increases the price of pens, even by a small amount, while the shop close by maintains the lower price, the quantity demanded from the bookshop will fall to zero. There is also the unit elastic demand, when (PED) = 1. This is where price and quantity change in exactly the same proportion. Any rise in price will be exactly offset by a fall in quantity, leaving total consumer expenditure unchanged. ...read more.

Conclusion

Quantity Demanded 0 Income The above figure shows an income elasticity of demand that is between zero and one. In this case, the quantity demanded increases as income increases, but income increases faster than the quantity demanded. Examples of goods in this category are food, clothing, furniture, newspapers and magazines. o Less than zero. In this case, the quantity demanded increases as income increases until it reaches a maximum at income m. Beyond that point, as income continues to increase, the quantity demanded declines. The elasticity of demand is positive but less than one up to income m. Beyond income m, the income elasticity of demand is negative. Examples of goods in this category are small motorcycles, potatoes, rice and bread. Low-income consumers buy most of these goods. At low-income levels, the demand for such goods increases. But as income increases above point m, consumers replace these goods with superior alternatives. For instance, a small car replaces the motorcycle; fruits, vegetables and meat begin to appear in a diet that was heavy in bread, rice or potatoes. The following figure shows an income elasticity of demand that eventually becomes negative. Quantity demanded 0 m Income Drawing a conclusion, elasticity of demand has many different concepts, which help both producers and consumers in economic decision-making. ...read more.

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The essay could do with more statistics, for example including example figures from diagrams in the formulae for elasticity of demand, to support the concepts of inelastic and elastic demand. The conclusion is also very short. Furthermore, the author didn't fully explain why the concepts help producers. It should be explained further that a producer can increase the price if demand is inelastic, but then this has implications in terms of customer loyalty. Moreover, how does elasticity help consumers? It's more of a concept to say how price changes alter consumers' demand, rather than a tool they can actually use.

Marked by teacher Nick Simmons 25/03/2012

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