Define and Explain the Concept

1360 Words Oct 16th, 1999 6 Pages
Price elasticity of demand is defined as how demand changes as a result of a change in price. It can be said that if a reduction in price leads to an increase in demand then demand is relatively elastic. Elasticity is usually negative. There is an alternative scenario where demand will increase as price does so too. This happens only in the case of Giffen goods, where elasticity is positive. The formula for price elasticity of demand is: Percentage Change in Quantity Demanded Percentage Change in Price One determinant of price elasticity is the number and closeness of substitutes there are available for a good. The closer the goods are, the greater will be the price elasticity of demand of that good. The reason for this being …show more content…
The major determinant of cross elasticity of demand is the closeness of the substitute or complement. The closer it is, the bigger will be the effect on the first good of change in the price of the substitute or complement, and so the greater the cross elasticity. Firms would want to know the cross elasticity of demand for their product when considering the effect on the demand for their product of a change in the price of a rival’s product or of a complementary product. These are vital to firms when making their production plans. Due to the fact that rail fares are relatively price inelastic, a small rise in the price of a ticket would not seriously affect the number of people travelling by train in the United Kingdom. This is because only a very small proportion of our income is spent on train tickets, so a big percentage rise in the cost of a ticket is borne by us without too much difficulty. However, as the road network of the United Kingdom cover a vaster expanse of land than the rail network does, sometimes coach travel is the only alternative to the car. Cross elasticity of demand for coaches in these areas will be zero. In places served by both road and rail networks, coach travels demand will probably be greater, even though it probably makes less financial sense. This is because sometimes people prefer a private coach with people they know than public transport. Also, a coach will take you to the exact destination
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