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Principles of Economics Essay

It is the measure of the responsiveness of quantity demanded to a change in the price level of the product, a product may be perfectly elastic, perfect inelastic and unitary, when a good’s elasticity is perfectly inelastic then a change in the price of the product will not change the amount demanded, a perfect elastic product is that which its demand will change by a large magnitude than the change in price. It is a tool for measuring the responsiveness of a function to changes in parameters in a relative way.

An “elastic” good is one whose price elasticity of demand has a magnitude greater than one. Price elasticity is an important concept because it tells us how responsive the demand or supply will be to changes in price. If prices rise by 10% will the demand or supply fall or rise by less than 10% or more than 10% . It is important to businesses because it influences their behavior in terms of pricing strategies and the degree of market power they exercise. Some businesses are able to charge different prices for the same product at different times because the degree of elasticity is different.

Elasticity has an important influence on

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the total revenue earned by the firm following changes in price and is therefore very demand and supply conditions. We can see this clearly in the case of the increase in tetra duty – there are very few substitutes for petrol and as a result in the short term motorists and public carriers have very little choice but to pay the higher price – the influence on the level of demand therefore is going to be negligible. Knowledge of such concepts allows us to be able to offer an insight into government policy on this issue. If the government claim to be increasing petrol duty to influence behavior – I. . Get people out of their cars and onto alternative forms of transport, without at the same time investing heavily in those alternatives we might question their true motives. Free market gives the absolute power to prices to determine the allocation and distribution of goods and services. These prices, in turn, are fixed by the forces of supply and demand of a respective commodity. In cases of demand falling short of the supply of a respective commodity, the price will fall as opposed to a price rise when the supply is inadequate to meet the growing demand of a good or service.

Free market economy is also characterized by free trade without any tariffs or subsidies imposed by the government. There the price mechanism solves all the problems of production. The price of any commodity in the market is determined by he general interaction of the forces of the demand and supply. Demand is the desire backed by ability and willingness to pay for a commodity. It generally means the desire or want for a thing. But in economics mere desire or want for a thing is not a demand. Only when the desire for a commodity is backed by the ability and willingness to pay for it the willingness became demand.

A beggar may have a desire to own a motor car. But he has no means to purchase one. It is, therefore, a mere desire, and it is not demand. Similarly a miser may have the desire to have a sumptuous meal. He has the means too. But he is not willing to part with the money for the meal. If so, it is a mere desire, and it cannot be a demand. In short Demand is desire backed by ability and willingness to pay for a thing. The demand for a commodity refers to the quantity demanded of a commodity in the market in a given period of a time at a given price. Demand for a commodity is always at a price.

A person’s demand for a commodity varies according to its price. At a lower price he will buy more of a commodity and only less at a higher price. The demand for a commodity also implies the amount of the commodity to be purchased at a particular mime, say, a day, a week etc. ELASTICITY OF DEMAND Elasticity of demand refers the degree of responsiveness of demand for a commodity to a change in its price. Elasticity means responsiveness or sensitiveness. The law of demand makes it clear that change in price leads to a change in demand. But it does not explain at what rate demand changes when price changes.

It is for explaining this aspect of demand that the concept of elasticity of demand is introduced. Elasticity of demand tells us exactly how much the quantity demanded would increase or decrease as a result of a given fall or rise in price. An important aspect of a product’s demand curve is how much the quantity demanded changes when the price changes. The economic measure of this response is the price elasticity of demand. The price elasticity of demand measures the responsiveness of quantity demanded to a change in price, with all other factors held The Price Elasticity of Demand (commonly known as Just price elasticity) constant. Ormolu for the Price Elasticity of Demand (PEED) is: PEED = (% Change in Quantity Demanded)/(% Change in Price) Elasticity of demand for the same commodities may be different in different market. Also the demand for a commodity depends upon a number of factors. They include, price of the commodity, the money income of the individual house holds, the tastes and preferences of the individual household and the price of the other commodities. 1 . The price of the commodity: Among the various factors that affect the demand for a commodity, the price of the commodity is most important.

Generally, when the price of the commodity falls more of it is purchased and the price rises only less is purchased. 2. Income of the house hold: Generally a rise in the income of the households results in an increase in the demand for various goods. This means that both the income and demand for commodity move in the same direction. But there are certain exceptional cases when a rise in income may not bring about any increase in the demand for certain commodities. 3. Tastes and preference of the households: it influences their demand for commodities. These are generally assumed to remain constant.

But they may change owing to the influence of advertisement, or change in fashion or owing to the desire of the members of the households to imitate their neighbors. When this happens the household demand for the commodity changes. 4. Prices of other commodities: It also affects the demand or a commodity. 5. Duration: The more time a consumer has to search for substitute goods, the more elastic the demand. 6. Availability of Information Concerning Substitute Goods: The easier it is for a consumer to locate the substitute goods, the more willing he will be to undertake the search. . Necessity: With a true necessity a consumer has neither the willingness nor the ability to postpone consumption. There are few or no satisfactory substitutes As per the law of demand, the quantity demanded of a commodity varies inversely with its price, other determinants of demand remaining unchanged. The law of demand expresses the relationship between the quantity demanded and the price. The amount demanded increases with a fall in price and contracts with a rise in price. This means that the relationship between the price of a commodity and its demand is inverse.

This inverse relationship between demand and price is called the law of demand. The price elasticity of demand refers the degree of responsiveness of demand for a commodity to a change in its price. The higher the price elasticity, the more sensitive consumers are to price changes. Very high price elasticity suggests that when the price off DOD goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. Very low price elasticity implies Just the opposite, that changes in price have little influence on demand.

On the basis of the responsiveness of demand to changes in price, elasticity of demand is generally classified into five categories. 1. Perfectly elastic demand: Demand for a commodity is said to be perfectly elastic when a slight change in price causes infinite change in the quantity demanded. 2. Perfectly inelastic demand: demand for a commodity is said to be perfectly inelastic when quantity of the . Elastic demand (more elastic demand): demand for a commodity is said to be elastic when a small change in price brings about a proportionately larger change in the quantity demanded. . Unit elastic demand: demand is said to be unit elastic when a given proportionate change in the price of a commodity causes an equal and proportionate change in the quantity demanded. 5. Inelastic demand(Less Elastic demand): When a given change in price leads o a proportionately smaller change in demand the demand is said to be inelastic.

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