Elasticity Managers of a business would like to estimate the demand for their products in the future thus they use the concept of the elasticity of demand Gillespie 2014 which will lead to the definition of elasticity itself Mankiw and Taylor define elasticity as the measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants Mankiw and Taylor 2011 pp 94 We can call a price as a price elastic when it has a value that is higher than 1 which means that the percentage change in the quantity demanded is more than the percentage change in price Gillespie 2014 pp 71 that can be explained as when the price goes down the total revenue goes high and vice versa For instance daily express Tesco bread and kit kat chocolate bar The common factor among these products is that an increase in the price a higher decrease in demand While an inelastic price which has a value that is less than 1 can be defined as when the percentage change in the quantity demanded is less than the percentage change in price Gillespie 2014 pp 71 which can be explained by the fact that whenever the price goes high the total revenue goes down and vice versa
Examples of inelastic products are petrol tap water and diamonds For these products when an increase in price causes a slighter decrease in demand which means that the total revenue can rarely be affected by the change in the price for these types of products To understand the concept of elasticity more Figure 1 shows an example of the price elasticity for food and beverage It is clear from the graph that whenever the type of food is more important the elasticity for it becomes less which in this graph the egg which most people eat is more inelastic than soft drinks which are more likely to be luxurious and so on In order to understand elasticity there are two variables that are crucial to analyse elasticity in an accurate way which are the sign and the size of the answer that you get Having the answer positive or negative will affect the way variables move Also the value of the answer is very important because it shows how sensitive demand is to the variable it shows whether the price is elastic or inelastic Figure 1 1 1 Price elasticity of demand PED There are several types of elasticity there is the elasticity of demand PED the Income elasticity of demand YED cross elasticity of demand XED price elasticity of supply PES and other types of elasticity This report will focus more on PED and YED Gillespie 2016 For a start the Price elasticity of demand shows the relationship between price and quantity demanded and offers an accurate result of how the change in the price may affect the quantity of demand Rissel however says that Price elasticity of demand measures how sensitive demand for a good or service is to a change in the price Rissel 2011 p 22 PED must always have a negative sign because whenever the price goes high the total revenue goes down It is clear from
Figure 2 that whenever the price goes low the quantity of demand goes high and vice versa The square that is shown in Figure 2 represents the total revenue Building on what was written before the answer for PED is important because if the PED for a good is between 0 and 1 that means that this good is relatively inelastic and the demand curve will be relatively sharper While if it was between 1 and that stands for the fact that this good is quite elastic and its demand curve will be flatter 1 1 Income elasticity of demand YED It is well known that whenever the income for a nation or a family rises so does its demand for goods and services Fuchs 1965 defines income elasticity as The ratio of the percentage increase in demand to the percentage increase in income Thus it can be said that YED shows and studies how responsive is the demand for a product is to change in someone's income Fuchs 1965 There are two types of goods there are normal and inferior luxuries goods Normal goods are more like the necessities For instance milk and bread and whenever YED is positive that means that this good in a normal good On the other hand normal luxuries are products that have a high and positive elasticity and these products are considered luxuries depending on the consumers Whenever the income is rising during an economic growth period because of that the demand for luxuries goods will fall causing an inward shift in the curve and vice versa
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