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

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...


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.


= ?. 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.


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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Microeconomics section.

Found what you're looking for?

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

Here's what a teacher thought of this essay

3 star(s)

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

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 University Degree Microeconomics essays

  1. What is the nature of uncertainty in a model of oligopoly, and how does ...

    was reduced likewise within the hour. An oligopoly firm that ignores its rival behaviour is likely to suffer a loss of profit. When managers of an oligopolist are trying to predict the decisions, reactions, and reactions to reactions of their competitors, they must assume that they are as intelligent and rational as themselves.

  2. The Petroleum Market 1970 - 2001

    In March 1971, the balance of power shifted. That month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce.

  1. Motorola Inc -Case Analysis.

    It should be a conscious agreement between the engineers who understand the production needs and the managers who understand the business needs. Flexibility of is a must for these measures. Good measure always has of feedback loop which helps to fine tune the set standards.

  2. Free essay

    Analysis of market structure in the airline industry.

    This relates to the airline industry as the five alliances as stated in the above illustration with the largest market share will be able to keep their existing power over the airline business. Barriers to entry in the airline market include high set up costs, legal requirements, brand loyalty and economies of scale.

  1. Compare and contrast 2 types of market structure using the economic models you have ...

    This ensures that no consumer has any economic incentive to pay any firm a higher price for the product than is charged by other firms. There is also a freedom of entry into and exit from the industry. There are no significant financial, legal, technological or other barriers to new firms entering the industry or existing firms leaving it.

  2. In this essay, a comparison between monopoly and perfect competition will be given firstly. ...

    The second form of barriers to entry is that the costs of production make a monopoly firm more efficient than other producers. In some cases, it can be also explained as a monopoly has economies of scale. The last type is that a monopoly firm may get key resources which are no close substitutes.

  1. Investigating Business - Aims and Objectives of Land Rover.

    * Land Rover exports to Spain, France, Portugal, Italy and Germany. * During the years of 2002- 2003, the sales of Land Rover changed dramatically. Sales to North America, Europe and ROW went up by over 2000 cars and the UK went up by just over 2000 cars.

  2. Every public limited company has organisational functions these are the main activities of the ...

    This department is in charge of giving budgets to other departments (by doing this it makes sure that the business reaches break even and no less in really bad circumstances). This is also, so that the other departments keep to their main objective and responsibilities and do not waste money.

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