# Define price elasticity of demand, and explain the main influences which make the demand for some goods elastic and the demand for others inelastic. B. How relevant do you consider price elasticity and income elasticity of demand to be to the followi

Economics essay

1. Define price elasticity of demand, and explain the main influences which make the demand for some goods elastic and the demand for others inelastic.
2. How relevant do you consider price elasticity and income elasticity of demand to be to the following
1. Governments taxation policy
2. When the firm is considering what price it should charge

Outline

1. Introduction
4. Conclusions
5. Appendices
6. Reference

I. Introduction

Price elasticity of demand or PED shows responsiveness of the quantity of a product demanded, to change in price of the product.  PED measures how elastic demand of product. It can be elastic or inelastic.  If product is inelastic, change in price will not lead to massive drop or increase in quantity demanded. If it is elastic change in price will lead rice or fall in demand (Ison and Wall, 2007). Best way to show this responsiveness is to use formula or graph (see appendices graph 1).

Formula:  PED= % Change in the quantity demanded

%Change in the price

Graph one shows elastic demand to the product which is = 1. It means that if quantity changes, price respond more sensitive.  On (graph 2 A) shows perfectly inelastic demand= 0, that means at any given price demand is constant. But on (graph 2 B) it is directly opposite to (A).

Income elasticity of demand or YED measures change in quantity demanded of product to change in income.

YED = %  change  in  QD  of  X

% change in real income

YED can be positive, zero or negative- inferior (see graph 5). Where YED is positive it is a normal good. Between Y1 and Y2 it is zero, which means that after certain increase in income people stop demand that product more because they cannot more of that product. After Y2 YED become negative or inferior, where consumers usually go for better quality product and higher price, in other words they switch to different product (Ison and Wall, 2007).

Demand and supply

In economics demand is not only willing to buy product but also an ability to buy. A lot of factors affect demand: product price, price of other products, taste and lots of other facts that vary according to product or service.  Movements along demand curve are only caused by change in price of product (see appendices graph 1). Increase in price known as conjunction and decrease as expansion. However shift of the demand curve are caused by change in price of another products, advertising, house hold income (see graph 1). Shift to the right represents ...