Price Elasticity of Demand and Supply

1102 Words Jan 12th, 2011 5 Pages
Q. Discuss how a supplier of a product that is currently fashionable might use both of these concepts in making price and output decisions.

Price Elasticity of Demand

The price elasticity of demand measures the sensitivity of the quantity demanded to price. The price elasticity of demand is the percentage change in quantity demanded brought by a 1 percent change in price. The value of price elasticity of demand for a normal good must always be negative, reflecting the fact that demand curves slope downward because of the inverse relationship of price and quantity.

The price elasticity of demand can be an extremely useful piece of information for business firms, nonprofit institutions, and other organizations that are
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The price elasticity of supply tells us the percentage change in quantity supplied for each percent change in price. The value of price elasticity of supply for a normal good must always be positive, reflecting the fact that supply curves slope upward because of the positive relationship of price and quantity.

Similarly as price elasticity of demand, price elasticity of supply can be also an extremely useful piece of information for business firms in deciding how much to produce their products. To see why a business might care about the price elasticity of supply, let’s consider how an increase in price might affect a business’s total revenue. Since price and quantity have a positive relationship in price elasticity of supply, a higher price will generally mean producing at a higher quantity, so the total revenue will increase. Economists have classified the possible range of values for price elasticity of supply as ‘Inelastic Supply, ‘Unitary Elastic Supply, and ‘Elastic Supply’. In the process of helping a supplier of a product that is currently fashionable to decide output decision, we must first identify the classification that the product is in right now as being ‘fashionable’. As mentioned earlier, the price elasticity of supply is used to see how sensitive the supply of a good is to a price change. The higher the price elasticity, the more sensitive producers and sellers are to price changes. A very high price elasticity suggests