- Download PDF
3 Answers | Add Yours
Price elasticity of demand has to do with whether a change in price causes a great change in quantity demanded or a small change. If the price goes up and the quantity demanded changes only a little, we say that demand is inelastic. If the quantity demanded changes a lot, we say that demand is elastic.
Demand is unitary elastic (or unit elastic) when the change in quantity demanded is exactly equal to the change in price. If the price of the product goes up by 10%, the quantity demanded goes down by 10%. If the price goes down by 5%, the quantity demanded goes up by 5%. Therefore, if the demand for the product is unit elastic, a change in price will not cause any change in total revenues.
Price elasticity of demand measure the responsiveness of percentage change in quantity demanded to a percentage change in price.
If a price elasticity of demand gives a figure which is exactly 1 this would mean unitary elasticity of demand shown by a rectangular hyperbola. It is when a percentage change in price results an equal percentage change in quantity demanded.
EG:- A percentage change in price of product C by 1% would change the quantity demanded by one person.
When a change in demand is greater than the change in price, the demand on the product or good is said to be elastic. When a product is elastic, slight changes in price lead to huge changes in the demand of the product. Many goods and services not necessity items, are usually highly elastic. To determine the elasticity of the demand of a product, the percent change in quantity is divided by the percent change in price. When this equation is calculated, the answer reveals a product's elasticity. If the answer to the equation is equal to or greater than one, the product is considered elastic.
Inelastic refers to the change in demand being less than the change in price on the product or good. Products considered inelastic are typically products people consider necessities. Changes in prices do not change the demand for the product very much. When the elasticity equation is calculated, goods that are considered inelastic have an answer that is less than one.
Goods that are considered unitary in terms of elasticity are goods that result in no effect in demand even when prices change. There are few goods ever considered unitary, but products such as medicine or utilities can sometimes reach this point. No matter what prices are charged, people find a way to purchase the goods, regardless. Companies selling goods that are unitary often make large profits because people consider these goods a necessity above all other goods.
The elasticity of goods is controlled by three main factors. The availability of substitutes is the first factor. Goods that can be substituted easily tend to be more elastic. For example if the price of donuts goes up significantly, people may start purchasing Danishes instead. Therefore the demand of donuts decreases significantly because people are substituting Danishes for donuts. The amount of income available to spend is another factor. When a person's income remains the same and an item they regularly purchase doubles, the person may no longer be able to afford to purchase the item. Timing is the last factor. For products that a person remains buying no matter what the price is -- is a huge factor in price elasticity. Cigarettes are an obvious example. People may continue to smoke even if the price per pack of cigarettes rises 100 percent. The person also may cut back and eventually quit because of the price.
We’ve answered 319,680 questions. We can answer yours, too.Ask a question