Introduction large number (change in price is

Introduction

         Investopedia defines
elasticity as a measure of a variable’s sensitivity to a change in another
variable. Elasticity could be seen as a question that inquires: how much will
the demand of a particular product increase or decrease if the price of that
product is altered a certain amount. This measure is usually collected as a
percentage, the percentage of change in a product’s demand with respect to the
percentage of change in that product’s price. This study benefits the
individual by screening how much a specific product’s demand is affected by the
change in price which would assist the producer/ supplier in deducing not only
weather or not the product’s price should be changed, but also how much change
is that product able to intake. There are four basic types of elasticity: price
elasticity of demand, income elasticity of demand, cross elasticity of demand,
and price elasticity of demand. Tutor2u defines market structure as the
organizational and other characteristics of a market. Market structure takes
into consideration the number of firms in the industry, the nature of the
product produced, the level of profits that the firm is able to generate, and
how much market power firms consume.

 

 

Price Elasticity Of Demand

         Investopedia defines Price Elasticity of
Demand as a measure of the relationship between a change in the quantity
demanded of a particular good and a change in its price. This measurement
technique is based on measuring the change in the demand after the price of a
particular good is changed. This is usually acquired as a percentage and is
measured using the formula:

If the
number obtained using this equation is a large number (change in price is
small, change in quantity demanded is large), the product is considered
elastic. This means that the demand of the product or good is very sensitive to
any change in the price. If the Price Elasticity of Demand is equal to zero,
the demand is said to be perfectly inelastic, which means that it will not
change if any change in price is presented. If the Price Elasticity of Demand
is equal to a number between zero and one, the demand is considered inelastic.

This means that the percent change in demand is less than the percent change in
price. Which indicates that the demand will change if the price changes, but it
will do so in an inferior manner to the price. If the Price Elasticity of
Demand is equal to one, this means that the percent change in demand is equal
to the percent change in price. Demand is said to be unit elastic. If the Price
Elasticity of Demand is greater than one, the demand is said to be perfectly
elastic, which means that the demand will be affected greatly with any change
in price.

 

 

Income Elasticity of Demand

         Economicshelp.org defines Income
Elasticity of Demand as the responsiveness of demand to a change in income.

There are 2 types of Income Elasticity of Demand, Normal goods and Inferior
Goods. Normal good is a good whose demand increases when income increases (and
vice versa). Inferior good is a good whose demand decreases when income
increases (and vice versa). This measuring technique measures the increase or
decrease in the percentage of demand with respect to the change in the
percentage of income. This is acquired using the following formula:

 

 

 

 

 

 

 

 

 

 

Examples

Example on Price Elasticity of
Demand:

A soft drink
company increased the price of every bottle from 2 pounds to 3 pounds (50%
increase in price). The demand on the soft drink decreased from 50,000 bottles
to 30,000 (40% decrease). PED is equal to 40%/ 50% = 0.8. This product is said
to be inelastic.

 

            

 

 

 

 

 

 

Example on Income Elasticity of
Demand:

A person’s income
increased from 20,000 pounds to 30,000 pounds (50% increase). His demand for
T-shirts increased from 20 T-shirts to 35 T-shirts (75% increase). YED is equal
to 75%/ 50% = 1.5. This is considered a normal good and is said to be elastic.

 

                

 

 

 

 

 

 

 

 

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