...concepts of price elasticity of demand and elasticity of supply to explore and explain the large fluctuations in the retail price of gasoline over the last 3 years. Use price elasticity concepts to explore the accompanying closure of many gasoline retailers. Also, discuss the impact of cross-elasticity of demand. According to various literatures petroleum is the single largest source of energy used in the United States. It is said that the USA uses two times more petroleum than either coal or natural gas and four times more than nuclear power or renewable energy sources. However, before petroleum can be used it is sent to a refinery where it is physically, thermally, and chemically separated into fractions and then converted into finished products such as the gasoline that is purchases at the pumps. Fluctuations in the average gasoline prices has been caused for concerns, this paper will attempt to look at this through the economic concepts of price elasticity of demand and supply to explain the fluctuation in gasoline retail prices in the USA over the past three years. Price elasticity of demand measures the degree to which unit sales of a product or service are affected by change in price. The demand for a product is said to be in-elastic if a change in price has little effect on the number of units sold. On the other hand demand is said to be elastic if a small change in price has a substantial effect on the number of unit sold. The price elasticity of supply is...
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...Individual Project Professor Reddy Urimindi The Price Elasticity of Demand is used to measure how the rate of response of quantity demanded changes due to a price increase or decrease. The formula used to compute the Price Elasticity of Demand (PEoD) is: PEoD = (% Change in Quantity Demanded) / (% Change in Price). To calculate the % change in quantity demanded, we use the formula: QDemand(NEW) - QDemand(OLD) / QDemand(OLD) To calculate the % change in price, we use the formula: Price(NEW) - Price(OLD) / Price(OLD) Elastic goods are sensitive to prices because an increase in price will have a greater influence on demand for that good. Inelastic goods are goods that not very price sensitive and price changes have little influence on their demand. Examples of ineleastic goods are bread, milk, and fuel. These are considered necessities of life and consumer will still buy them regardless of price fluctuations. The higher the price elasticity, the more sensitive consumers are to price changes. A good with a high price elasticity would suggest that when the price of that good goes up, consumers will buy a lot less of it which increases the supply, and when the price of that same good goes down, consumers will buy a lot more of it and decrease the supply. A good with a low price elasticity would mean just the opposite, that changes in price will have little influence on demand. Example 1. The price of a laptop increases by 20% and there is a 40% drop in...
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...PRICE ELASTICITY “Have U.S. Drivers Reached Filling Point of No Return?” by Justin Lahart & “Airlines Try Business-Fare Cuts, Find They Don’t Lose Revenue” by Scott McCartney While price is the strongest factor affecting demand, there are several factors that heavily influence the price elasticity of demand. Inelastic products are much less resistant to affects from price increases, allowing managers the flexibility to raise prices with little to no concern for losing sales. On the contrary, elastic products are highly vulnerable to and influenced by fluctuations in price. The elasticity of a product can change over time, affecting firms and industries that utilize that product. “Have U.S. Drivers Reached Filling Point of No Return?” by Justin Lahart and “Airlines Try Business-Fare Cuts, Find They Don’t Lose Revenue” by Scott McCartney discuss the affects of changing elasticity in gasoline and airplane tickets, respectively. The articles highlight the number of substitute goods, the percentage of a consumer’s budget spent on a product, and the time period that the product is under construction as strong influences on the price elasticity of gas and airplane ticket prices. The price of gasoline has begun to show a shift from heavily inelastic to more elastic in recent history. Our textbook, Economics for Managers, discusses the affects of the in-elasticity of gasoline prices that was present in the mid 2000s. The book points to higher incomes within a sustainable...
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...In order to assess whether raising tuition will increase or decrease revenue we need to determine what revenue is. Total revenue is the number of dollars that an organization receives from people who purchase its products or services (Amacher & Pate, 2013). The formula to compute total revenue is to multiply the price of each unit sold by the quantity of units sold. tr = p x q or total revenue = price x quantity In the case of the Nobody State University, p (price) is the tuition students pay and q (quantity) is how many students are enrolled yearly. If the total annual costs are held constant, a raise in the amount of tuition paid by every student will result in an increase, in total revenue. However, raising the tuition may not result in an increase because there may be a decrease in students enrolling which would result in a decrease in revenue. In cases where the total annual costs are not constant, increase in tuition will not necessarily result in a rise in the total revenue. There are many factors that determine the amount of revenue an organization will get. Costs (variable, fixed, and marginal costs) are factors that affect revenue (Khan Academy, n.d). For a school, the total cost is the money the school has to spend to teach the students. The balance determines whether revenue will increase or increase. An increase in the total annual revenue for the university happens under certain conditions. It will increase if the number of students enrolled increases...
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...Price elasticity of demand represents the change in the quantity demand and the change in its price. When calculating price elasticity of demand the following formula is used: Price Elasticity of Demand = % Change in Quantity demanded / % Change in Price (Investopedia). It is also important to consider the fact that “a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes) (Investopedia)”. Considering our competitor RedBull we must understand that in order to stand out we must come up with a better price than our competitor, or better yet create a promotional offer “buy one get one free” for a limited period of time and be priced just as our competitor. In terms of technological innovation that it can be an issue, since we know an innovation has been implemented when the first energy drink was introduced to our market. Since we know when bringing to the market a new product most of the capital must go into marketing and promotional items exclusive to the new product, being conservative in the number of employees and ask some of the employees to execute multiple tasks in the company could save money on the capital employed and still complete the job and the amount of labor as scheduled. The 'Law of Diminishing Marginal Productivity' is “an economic principle that states that while increasing one input and keeping other inputs at the same level may initially increase output, further increases...
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...250-360-1560 Transit Price Elasticities and Cross-Elasticities 25 May 2012 Todd Litman Victoria Transport Policy Institute Abstract This paper summarizes price elasticities and cross elasticities for use in public transit planning. It describes how elasticities are used, and summarizes previous research on transit elasticities. Commonly used transit elasticity values are largely based on studies of short- and medium-run impacts performed decades ago when real incomes where lower and a larger portion of the population was transit dependent. As a result, they tend to be lower than appropriate to model long-run impacts. Analysis based on these elasticity values tends to understate the potential of transit fare reductions and service improvements to reduce problems such as traffic congestion and vehicle pollution, and understate the long-term negative impacts that fare increases and service cuts will have on transit ridership, transit revenue, traffic congestion and pollution emissions. Originally published as “Transit Price Elasticities and Cross-Elasticities,” Journal of Public Transportation, Vol. 7, No. 2, (www.nctr.usf.edu/jpt/pdf/JPT 7-2 Litman.pdf), 2004, pp. 37-58. Todd Litman 2004-2011 You are welcome and encouraged to copy, distribute, share and excerpt this document and its ideas, provided the author is given attribution. Please send your corrections, comments and suggestions for improvement. Transit Elasticities and Price Elasticities Victoria Transport...
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...The price of gasoline has a close relationship with the price of oil. According to Wikipedia, Crude oil is the primary raw material used to produce gasoline and from the mid 1980s to 2003 the price of a barrel of oil was generally under $25. In 2003 the price reached $30 per barrel and by 2005 was up to $60. It peaked in 2008 at almost $150 per barrel and has been causing great economic hardship for societies across the globe. There are several reasons for the increase such as declines in petroleum reserves, tension in the Middle-East and oil price speculation. (Wikipedia.com) The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of twelve developing countries including Saudi Arabia, Nigeria and Venezuela, who pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations. It secures a steady income for its members while ensuring an efficient and reliable supply of petroleum to consuming nations and a fair return for investors in the petroleum industry. OPEC’s influence has been criticized since it became effective in determining production and prices. (Wikipedia) Even though this paper focuses on gasoline prices, it is impossible for me to speak about gas and not also mention oil. Economies around the world are very dependent on oil which is vital to providing petroleum for motor vehicles as well as generating electricity. A decade ago...
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...Price elasticity of demand From Wikipedia, the free encyclopedia Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. Contents [hide] * 1 Definition...
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...Assignment: Show that Price Elasticity of demand (Ep) changes from 0 to -∞ as we move along the linear demand curve. Solution: Demand Curve: Relationship between the quantities of a good that consumers are willing to buy and the price of the good. Linear Demand Curve: Demand Curve that is a straight line. In mathematical form, it can be defined as Q = a – bP Where Q = Quantity demanded; P = Price per unit of the good; and a, b = constants Elastic range Price Ep = -∞ (PerfectlyElastic) Q = a- bP . Ep = -1(Unitory elastic) Inelastic range Ep = 0 (Perfectly inelastic) Quantity Price Elasticity of Demand: Percentage change in quantity demanded of a good as a result from a 1- percent increase in its price. In mathematical form, it can be defined as Ep = ΔQ/Q = (P/Q) (ΔQ/ΔP) …………..(1) ΔP/P Where Q, P = same as above ΔQ = Change in quantity demanded ΔP = Change in Price per unit of the good Consider the Linear demand curve Q = a-bP Differentiating the above equation w.r.t. price, we have change in quantity w.r.t change in price ΔQ/ΔP = -b …………….(2) Substituting (2) in equation (1), we have, Ep = (P/Q) (-b) = (-Pb)/Q …………………..(3) From Equation (3), when P ...
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...Price elasticity of demand is the measurement of how responsive a good or service is demanded based on a percentage change in price. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in the price of the good or service. There are many factors that the price elasticity of demand that are considered such as ranges, determinants and relationships with revenue. Price elasticity of demand has three ranges when determined. The first is elastic demand. Elastic demand occurs when the price elasticity demand is greater than one. It occurs when a change in price of one percent causes one percent change in quantity demanded. Another range of elasticity is unit elasticity of demand. It occurs when a change of one percent causes exactly one percent to change in quantity demanded. A third range is inelastic demand. It is the opposite of elastic demand. It occurs when a change of a price of one percent is less than one percent in the quantity demanded (Miller, 2013). There three main determinants of price elasticity of demand. One determinant is the existence, number, and quantity of substitutes. The closer the substitutes for a certain product or service exist as well as the amount, the greater the price of the elasticity demanded will be. The second determinant is the percentage of a consumer’s total budget devoted to purchase the commodity. The greater the share of a person’s budget spent of a product or service, the greater the person’s...
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...Price Elasticity of Demand | | In this chapter we look at the idea of elasticity of demand, in other words, how sensitive is the demand for a product to a change in the product’s own price. You will find that elasticity of demand is perhaps one of the most important concepts to understand in your AS economics courseDefining elasticity of demandPed measures the responsiveness of demand for a product following a change in its own price. The formula for calculating the co-efficient of elasticity of demand is:“Percentage change in quantity demanded divided by the percentage change in price”Since changes in price and quantity nearly always move in opposite directions, economists usually do not bother to put in the minus sign. We are concerned with the co-efficient of elasticity of demand.Understanding values for price elasticity of demand * If Ped = 0 then demand is said to be perfectly inelastic. This means that demand does not change at all when the price changes – the demand curve will be vertical * If Ped is between 0 and 1 (i.e. the percentage change in demand from A to B is smaller than the percentage change in price), then demand is inelastic. Producers know that the change in demand will be proportionately smaller than the percentage change in price * If Ped = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is said to unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total...
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...A. 1. Elasticity of demand: According to McConnell, Elasticity of demand is the degree to which changes in prices and incomes affect the supply and demand,” (p 76). In other words elasticity tells us how much a price change effects sales or demand of a product. Elasticity can be measured and referred to as: elastic, unit elastic or inelastic. Elasticity of demand is measured: Ed=percentage change in quantity demanded of productpercentage change in price of product If the result is a coefficient greater than one the product price is elastic, if the result is equal to one it is considered unit elastic, and if the coefficient is less than one it is inelastic. 2. Cross-price elasticity: Cross-price elasticity refers to the elasticity of a product when there is a substitute, or compliment product to be considered. According to McConnell, (2012) “The cross elasticity of demand measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y). “ A substitute product is a product that can be used in place of the original product, at the consumer’s discretion. A compliment is a separate product that is generally purchased to be used with the original product, like peanut butter and jelly. E xy =percentage change in quantity demanded of product xpercentage change in price of product y If the coefficient results are more than zero, the product is considered a substitute product. If the result...
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...When looking at the price elasticity of Tyson products, we must also look at the determinants of the price elasticity of demand. Tyson’s products, chicken, beef, pork and prepared foods, all have a close substitute; people can choose to eat foods other than what Tyson provides. All of Tyson’s products can be considered a necessity since people need to eat in order to live. The cost of these products only uses up a small amount of a consumer’s budget, which generally makes Tyson’s goods less elastic. We can look at the market in which these products are sold in different ways: by brand and by product. Glenn and Patrick noted that the narrower a market is, the demand becomes more elastic (Glenn & Patrick, 2017). The market is narrower if we look at it in terms of product versus in terms of brand. All these determinants help set the price for Tyson’s chicken, beef, pork, and prepared products....
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...economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be: \frac{-20 \%}{10 \%}=-2. A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products. Assume products A and B are complements, meaning that an increase in the demand for A accompanies an increase in the quantity demanded for B. Therefore, if the price of product B decreases, the demand curve for product A shifts to the right, increasing A's demand, resulting in a negative value for the cross elasticity of demand. The exact opposite reasoning holds for substitutes. Contents [hide] 1 Results for main types of goods 1.1 Selected cross price elasticities of demand 2 See also 3 Notes 4 References 5 External links Results for main types of goods[edit] In the example above, the two goods, fuel and cars (consists of fuel consumption), are complements; that is, one is used with the other. In these cases the cross elasticity of demand will be negative, as shown by the decrease in demand for cars when the price for fuel will...
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...Concept of Price Elasticity and Total Revenue The importance of the price elasticity of demand for a business can be shown by the effect that it has on total revenue. The business will want to know whether a proposed price change will increase or decrease total revenue. Total revenue, by definition, is equal to the price times the quantity sold (TR=PxQ). [sometimes, when dealing with elasticity, the language used may call this total expenditures instead of total revenue, but it has the same meaning].Note what happens to the results of this formula (TR=PxQ) if a price change is involved. Due to the law of demand, the price will move in one direction, and the quantity sold will move in the other direction. Unless the price change and quantity change are both for the same percentage (unit elastic), then total revenue will also change whenever a price change is involved. The question is, does total revenue increase, or decrease? The answer depends on the direction of the price change along with the price elasticity of demand. If the price elasticity of demand is elastic (greater than 1), then that means that the quantity change is more than the price change. So total revenue (price times quantity) will decrease for a price increase, and increase for a price decrease. If the price elasticity of demand is inelastic (less than 1), then that means that the quantity change is less than the price change. So total revenue (price times quantity), increases for a price increase,...
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