Write an essay in which you discuss the concept of price elasticity of demand; explain how it can be calculated; and give the meaning of the elasticity co-efficient. Give three examples of goods that are price elastic, and explain why their buyers are not responsive to changes in the price of the good.
The demand curve can be used to provide information about how much quantity responds to a given change in price. Economists use a concept called elasticity to provide such information. Price elasticity of demand is defined as the responsiveness of quantity demanded to a change in the price of the good or service.
There are also many factors that determine whether the good is elastic or inelastic, they include...
Whether good is a necessity: necessity goods would be inelastic. Luxury goods would be elastic as they are not needed for survival.
Proportion of income spent: Expensive goods are likely to be price elastic as they take up a large amount of consumer income. However cheaper items would be price inelastic e.g. match boxes.
Time: if consumers have time to respond to a price change then the demand will be price elastic.
Availability of substitutes: the greater the number of close substitutes a good has the more price elastic its demand tends to be.
The price elasticity of demand is calculated by the formula
The answer obtained from the formula is known as the elasticity co-efficient. The rule used to determine whether the particular good or service is elastic or inelastic is as follows.
If PED = 0: This graphs shows a situation in which the value calculated is zero. This means that the demand for this good is perfectly inelastic and that the demand for the good does not change even though the price may change.
If PED is between 0 and 1: This graph shows an example of a good which is price inelastic. This means that the buyers are not sensitive to a price change and that the law of demand is relatively weak.
If PED is over: This diagram shows...