EGT1 Task 2
Element A
When we talk about elasticity, we are talking about the responsiveness of something to a stimulus. For example, season tickets and the ticket holder, elasticity in this case is driven by price. In this exercise, we will focus will be on demand side or the consumer side of elasticity.
Price elasticity of demand is figured as follows: % of the change of quantity demand over the percentage of change of price. What we want to figure out is how the consumer demand will change. Economists are most interest in how much will quantity demand fall.
There are three categories of price elasticity of demand, elastic, inelastic and unit elastic. When the price elasticity of demand equation is greater than one we refer to that good or service as elastic. Demand will often show a larger change in quantity purchased for a given price change. Elastic demand has a coefficient greater than one and is sensitive to price. For example, a braided rug increases in price by 10 percent. The consumer responded by purchasing 22.5% less of this particular rug. This product would be considered elastic showing a coefficient of 2.25 when compared to the critical threshold of one. This particular rug would be considered price sensitive.
When the price elasticity of demand equation is less than one the good or service will be referred to as inelastic. Inelasticity is referred to as having weak price sensitivity. The change in quantity purchased is small for a given price change.
On the rare occasion when a price change and the quantity demand is the same, this is referred to as unit elastic. This simply means that per each unit produced, price change is matched in the fluctuation of quantity demand.
The threshold for the price elasticity of demand is set at 1 and absolute values are used. We are looking for the category that the good or service falls in but not necessarily to what degree. Economist have shown us that they are most concerned with...