...comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries. Definition of 'Economy' The large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated. Definition of 'Elasticity'A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes. Calculated as: | | Investopedia explains 'Elasticity’Elasticity is used to assess the change in consumer demand as a result of a change in the good's price. When the value is greater than 1, this suggests that the demand for the good/service is affected by the price, whereas a value that is less than 1 suggest that the demand is insensitive to price. Businesses often strive to sell/market products or services that are or seem inelastic in demand because doing so can mean...
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...ELASTICITY OF DEMAND The Responsiveness of buyers to a change in the price of a commodity is called as Elasticity of Demand. It is the rate at which the quantity demanded of a commodity varies with a change in price. Demand is also effected by the Income of the customers and prices of related goods. So therefore, we have Income Elasticity of Demand (Ey) and Cross Elasticity of Demand (Exy) TYPES OF ELASTICITY OF DEMAND 1. Price Elasticity of Demand (Ed): It is the ratio of the percentage change in quantity demanded of a product to the percentage change in its price. Ed = % change in Qd % change in Price = q/q p/p TYPES OF ELASTICITY OF DEMAND 2. Income Elasticity of Demand (Ey): It is the degree of change or responsiveness of quantity demanded of a good to a change in the income of the consumer. Ey = % change in Qd = % change in Income q/q y/y TYPES OF ELASTICITY OF DEMAND 3. Cross Elasticity of Demand (Exy): It is the percentage change in the quantity demanded of one commodity say X due to the percentage change in the price of related commodity Y. Exy = % change in Qd of X % change in Price of Y = qx/qx Py/Py Cross Elasticity is concerned with two types of goods 1). Substitutes, it has positive Exy 2). Complementary, it has negative Exy DEGREES OF PRICE ELASTICITY OF DEMAND Type of Elasticity Perfectly Inelastic Perfectly Elastic Curve Tendency Vertical Horizontal Elasticity Value ε=0 ε= DEGREES OF PRICE ELASTICITY OF DEMAND ...
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...and equity. The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same. The income elasticity of demand is a measure of the responsiveness of the demand for a good or services to a change in income, other things remaining the same. VAT is an indirect tax where the tax is charged as a percentage of the value of a good. The amount of VAT imposed on a product depends on the elasticity of demand for the product. If the demand for the good is very elastic then the price will not increase as much when the tax is imposed but the quantity demanded will fall significantly. Price S + tax S £1.00 D1 £0.80 2 8 Quantity In this case, we see that the price has only risen a little by £0.20 compared to the amount of the tax. The main burden of the tax has fallen on sellers; sellers have to pay the entire tax which is only compensated by a small increase in price. This is the reason why indirect taxes are generally not levied on goods with elastic demand as the tax revenue will be relatively small. If the demand for a good is inelastic, the increase in price due to taxation will not affect the quantity demanded because buyers are less sensitive to price changes of these goods. Buyers pay the entire tax. Price ...
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...response to the demand of a product or service following a change in price, sales may increase when a price goes down. Sales may also decrease when the prices goes up. A2. The response or change in demand when the price of either a substitute product or complementary product increases or decreases. If two products are substitutes and the price of one of the substitutes increases we would expect to see purchases increase for the other substitute. In the case of complements as the price rises in one we would expect to see the purchases decrease for both. A3. Income elasticity is the measure of the rate of response of quantity demand due to an increase or decrease in a consumer’s income. For most goods an increase in income creates an increase in demand for items that are considered an indulgence, like name brand clothes, new cars and electronic equipment. Equally the demand for these goods decreases if income decreases. These goods whose demands vary based on income are called superior or normal goods. Most products are considered normal goods, however there are exceptions. When incomes increase to a certain point the demand for used or less popular items like second hand clothes and used cars decreases. These goods that vary inversely with money income are called inferior goods. B. The coefficient for elasticity of demand measures the relationship between two variables. The formula used is percentage in change of quantity /percentage change in price. Q/P. if the numerator...
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...To analyse the market, we will examine the price elasticity demand and income elasticity demand of tobacco products the factors affecting each of these and the externalities caused by this product. Further, to explore further into the tobacco market, this blog post will discuss the theory of Rational Addiction, which contributes greatly to tobacco consumption. A. Elasticity of tobacco products Before analysing the elasticity of the tobacco market, it is important to know the fundamentals of elasticity. To start, elasticity refers to the degree of change of the demand or supply of a product in response to change in price of the product. The elasticity of products varies because consumers may find some products more essential than others. A good or service is considered to be highly price elastic if a price increase leads to a sharp change in the quantity demanded or supplied. Conversely, the demand and supply of price inelastic goods or services sees modest changes with any change in price. In most countries, the price elasticity of demand for tobacco products is fairly inelastic. This will be discussed further below. I. Calculating price demand elasticity To determine the price demand elasticity of a product’s demand curve, the following equation can be used. Elasticity, Ped = (% change in quantity / % change in price) If the elasticity value we obtain from the above formula is greater than or equal to 1, the demand curve for that product is considered to be...
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...Price Discrimination Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly markets. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price. Although the term "discrimination" has negative (e.g. racist, sexist) connotations, the literal meaning of the word "discrimination" (from discriminatio, "a distinction") is neutral. "Price discrimination" is a technical term meaning only differentiation in price by customer, and is not intended as an accusation of criminal or unfairly biased behavior. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very...
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...the Concept of Price Elasticity of Demand and Discuss Its Relevance for Business and Government Explain the concept of Price Elasticity of Demand and discuss its relevance for Business and Government Price elasticity of demand According to the law of demand: the lower the price the more product is bought. But consumer response to changes in price can vary significantly from product to product. Economists measure the response (sensitivity) of consumers to changes in product prices, using the concept of price elasticity.The gist of the concept of price elasticity is:• if small changes in price leading to significant changes in the quantity bought products, demand for such products are commonly called elastic;• if a substantial change in price leads to only a small change in the amount of purchases, In these cases the demand is inelastic.The extent price elasticity or inelasticity of demand is measured by economists with Ed coefficient calculated by the following formula: The same formula can be written as: Proceeding from the formula, the demand is elastic, if the percentage change in price leads to a greater percentage change in the amount of products that is asked. For example, if a price reduction of 2% causes an increase in demand of 4%, demand is elastic. When demand is elastic, the elasticity is greater than unity. If the percentage change in price is accompanied by a relatively smaller change in the number of products that is asked, then demand is inelastic....
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...& 2 2. Explain how Market/Price mechanism solves there central problems of economics 1 & 2 3. Explain why the price in competitive markets settles down the equilibrium intersection of supply and demand. Explain what happens if the market price starts out too high or too low. 3 4.Explain the economic meaning 0f price elasticity of demand with the help of numerical example of your own choice. 4 & 5 5. Discuss the major determinant of price elasticity of Demand 4 & 5 6. Critically Discuss the law of diminishing marginal utility of a numerical example and suitable diagram 5 Price Elasticity of Demand The elasticity of demand (ed) is a measure of the price responsiveness to the quantity demanded and is equal to the percentage change in quantity demanded divided by the percentage change in price. Because the elasticity of demand can vary depending on whether one moves up or down the demand curve, elasticities of demand are often calculated by taking an average the prices and quantities given by the following formula: ed = change in Q / change in P (Q1 + Q2)/2 (P1 + P2)/2 Determinants of price elasticity of demand 1. existence of substitutes—the closer the substitutes for a particular commodity, the greater will be its price elasticity of demand 2. importance of the commodity in the consumers budget—the greater the percentage of a total budget spent on the commodity, the greater the person’s price elasticity of demand for that commodity 3. time...
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...Elasticity of Demand refers to the degree of responsiveness of quantity demanded to the changes in the determinants of demand i.e. price of the good, consumer income and price of related goods. There are three quantifiable determinants of demand and hence elasticity of demand can be of three types; * Price Elasticity of Demand Price Elasticity of demand is the degree of responsiveness of demand to a change in its price. In technical terms it is the ratio of the percentage change in demand to the percentage change in price. There are a number of factors that determine the price elasticity of demand. * If close substitutes are available then there is a tendency for customers to shift from one product to another when the price increases and demand is said to be elastic. For example, demand for two brands of tea. If the price of one brand, say Brand 1, increases then the demand for the other brand, say brand B increases. In other words greater the possibility of substitution greater the elasticity. * The amount of income spent by the customer on a commodity plays a great role in determining the price elasticity. The elasticity of the commodity will be more when the proportion of income spent on it is more. * The usefulness of the commodity is an important factor in determining the elasticity. If the commodity can be put to many uses then the elasticity will be greater. * If two commodities are consumed jointly i.e. complements, then increase in...
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...Discuss price elasticity of demand and how it can be applied. 2 Explain the usefulness of the total revenue test for price elasticity of demand. 3 Describe price elasticity of supply and how it can be applied. 4 Apply cross elasticity of demand and income elasticity of demand. 4 Elasticity In this chapter we extend Chapter 3’s discussion of demand and supply by explaining elasticity, an extremely important concept that helps us answer such questions as: Why do buyers of some products (for example, ocean cruises) respond to price increases by substantially reducing their purchases while buyers of other products (say, gasoline) respond by only slightly cutting back their purchases? Why do higher market prices for some products (for example, chicken) cause producers to greatly increase their output while price rises for other products (say, gold) cause only limited increases in output? Why does the demand for some products (for example, books) rise a great deal when household income increases while the demand for other products (say, milk) rises just a little? Elasticity extends our understanding of markets by letting us know the degree to which changes in prices and incomes affect supply and demand. Sometimes the responses are substantial, other times minimal or even nonexistent. But by knowing what to expect, businesses and the government can do a better job in deciding what to produce, how much to charge, and, surprisingly, what items to tax. 75 76 PART TWO Price, Quantity...
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...PAPER FIRST SEM MBA MANAGERIAL ECONOMICS “Kinds Of Elasticity Of Demand” “Factors Influencing Elasticity Of Demand” GROUP 2 ROLL NO | NAME | 7 | PRAVEEN KUMAR K L | 8 | PRAVEEN R | 9 | PRITHVI LINGH HONNESH | 10 | PRITHVI P M | 11 | PRIYA DARSHINI B A | 12 | PRIYANKA JAHAGIRDAR | ------------------------------------------------- ABSTRACT From the managerial point of view, the knowledge of nature of relationship between demand and its determinants alone is not sufficient. What is more important is the extent of relationship or the degree of responsiveness of demand to the changes in its determinants. The degree of responsiveness of demand to the change in its determinants is called elasticity of demand. The concept of elasticity of demand plays a crucial role in business-decisions regarding maneuvering of prices with a view to making larger profits. Almost most businessmen are intuitively aware of the elasticity of demand of the goods they make, however, the use of precise estimates of elasticity of demand will add precision to their business decisions. In this paper we will discuss * The various kinds of elasticity of demand * The nature of change and how it affects the decision taking. * How demand decisions in response to price changes vary for different types of goods? * Factors influencing the elasticity of demand INTRODUCTION Governments, business firms, supermarkets, consumers...
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...Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in real income. The formula for calculating income elasticity is: % change in demand divided by the % change in income Normal Goods Normal goods have a positive income elasticity of demand so as consumers’ income rises more is demanded at each price i.e. there is an outward shift of the demand curve Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand is rising less than proportionately to income. Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income – for example a 8% increase in income might lead to a 10% rise in the demand for new kitchens. The income elasticity of demand in this example is +1.25. Inferior Goods Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises. Typically inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. Examples include the demand for cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties. The income elasticity of demand is usually strongly positive for • Fine wines and spirits, high quality chocolates and luxury holidays overseas. • Sports...
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...DEFINITION of 'Elasticity' A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes. Economics Basics: Elasticity By Reem Heakal The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life. To determine the elasticity of the supply or demand curves, we can use this simple equation: Elasticity = (% change...
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...Pepsi, A reflection on its price & income elasticity Laura-Ashley Williams Colorado Technical University Author Note This paper was prepared for [ECON212], [CS13-01], taught by [Professor James Pirner] on [July 23, 2014]. Introduction The product chosen was Pepsi. It is a product produced by PepsiCo, which is one of the world's top marketer of premium juices and soft drinks. PepsiCo offers products to over 200 countries and territories, and our Global Brands are our biggest sellers. Pepsi is a carbonated soft drink sold in stores, restaurants, and vending machines internationally. Pepsi-Cola was created in the late 1890s by Caleb Bradham, a New Bern, N.C. pharmacist. Pepsi is one of the world’s most iconic and recognized consumer brands globally. Today, the Pepsi portfolio includes three products - Pepsi, Diet Pepsi and Pepsi MAX — that each generates more than $1 billion in annual retail sales. Today, more than ever, consumers are seeking new options for their snacking and beverage occasions. And now, more than ever, PepsiCo is strongly committed to providing a wide range of foods and beverages, from treats to healthy eats. In order to understand how Pepsi remains a product that meets or exceeds the customers’ expectations, I will describe the price and income elasticity of the product. Also, explaining any cross-elasticities that are involved. Pepsi's Price Elasticity The elasticity of demand for a commodity is the rate...
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...Elasticity Presented to:- Dr. Hamde Abd-el-Azem Sadat academy for management sciences Done by:- Ahmed gamal Ezz el-Din G: group 4 S: Managerial economics The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life. To determine the elasticity of the supply or demand curves, we can use this simple...
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