Price Elasticity of Demand

Elasticity of demand is the relationship between the demands for a product with respect to its price. Generally, when the demand for a product is high, the price of the product decreases. When demand decreases, prices tend to climb. Products that exhibit the characteristics of elasticity of demand are usually cars, appliances and other luxury items. Items such as clothing, medicine and food are considered to be necessities. Essential items usually possess inelasticity of demand. When this occurs prices do not change significantly.

Income Elasticity of Demand deals with the responsiveness of the quantity demanded of a good when the income of the consumer increases. It measures whether a good is a normal or an inferior good. "A product is a normal good when its income elasticity is positive, meaning that higher income causes people to purchase more of the product. For an inferior good, income elasticity is negative because an increase in income causes people to buy less of the product" (Kane, 2007). At Happy Pet Clinic, they want to calculate the income elasticity of their clients willing to do a "Wellness" panel of blood work on their pet if their clients have an increase in income.

availability of substitutes, and justify how you determine the price elasticity of demand for your firm’s product. b) Explain the factors that affect consumer responsiveness to price changes for this product, using the concept of price

4) Use an example to discuss why demand tends to be relatively elastic in a situation where “Availability of Substitutes” exists.

Different products have different elasticities. Heart medication, for example, is inelastic and corn is elastic. All firms can increase the volume of goods or services sold by cutting prices; however, elastic products are much more price sensitive than inelastic products. Find a product that has not already been selected and describe the price elasticity. How much control might an organization have over pricing based on a product’s

One definition of elasticity is what happens to consumer demand for a good when prices increase. As the price of a good rises, consumers will usually demand a lower quantity of that good, perhaps by consuming less, substituting other goods, and so on and the demand of complementary product will also be less. The greater the extent to which demand falls as price rises, the greater the price elasticity of demand. Conversely, as the price of a good falls, consumers will usually demand a greater quantity of that good, by consuming more, the demand of complementary will also rise, dropping substitutes, and so forth. However, there may be some goods that consumers require, cannot consume less of, and cannot find substitutes for even if prices

For instance, if the price, of Coco Cola would increase, the demand for Coco Cola would decrease dramatically, as Coco Cola has close substitutes, such as Pepsi. In addition, the income, of the buyer, also affects the elasticity, of demand. There is an elasticity corresponding to every factor that effects demand.

The reason why most of the consumers are buying the tomato priced at $2.35 is that they are looking for prestigious product. The tomatoes are being targeted for different consumers, and the price, in this case, plays an important role in the consumer’s choice. The tomato priced at $1.69 follows an elastic demand, which means that a change in the price of this tomato would result in a significance change in the demand. On the other hand, the tomato priced at $2.35 seems to follow an inelastic demand; it means that a change in the price would not substantially affect the demand of the product. However, the tomatoes are being priced narrowly, so if the store substantially reduces the price of the tomato sold at 2.35, it is possible that the consumers

Based on the above description, forms of elasticity will affect business decisions and pricing strategies differently depending on the nature and type of products or services being offered. Business organizations whose product offerings have elastic and perfectly elastic price elasticities of demand should not attempt to raise prices of their products because it will cause the quantity demanded and consequently total revenues to drop drastically. Businesses can there use the price elasticities of demand to determine whether the proposed changes in their prices will raise or reduce their total revenue. The following expression may be useful in helping business organizations to determine the impacts of elasticities on their total revenues based on the suggested price changes.

Proportion of the Consumer’s Income Spent: This is essentially the amount of the consumer’s money that is spent on a particular good or service. The higher the amount of their income that is spent on a good directly influences the elasticity of demand for it. Alternatively, the lower the amount of income spent, the lower a goods elasticity of demand is.

If when income increases by 2 percent and the price does not change, the quantity of airplane travel demanded increases by 6 percent, then the income elasticity of demand of airplane travel is ________.

A) If Maria spends one-third of her income on clothing, then her income elasticity of demand is 1 because maintaining her clothing expenditures as a constant fraction of her income means the percentage change in her quantity of clothing must equal her percentage change in income.

If the value of price elasticity coefficient is greater than one in absolute value. This means that a small change in price results to a greater change in quantity demanded.

Explain the relationship between the price elasticity of demand and total revenue. What are the impacts of various forms of elasticities (elastic, inelastic, unit elastic, etc.) on business decisions and strategies to maximize profit? Explain using empirical examples.

In this paper, I will attempt to compute the elasticity of each independent variable given the values and determine the implications for each computed elasticity. I will also be making recommendations on whether the firm should make any changes in price to increase its market share while outlining the significant factors that can affect supply and demand of a product.