Many scholars often wonder of questions framed as “At What Price Is The Elasticity Of Demand Equal To *”? Well, this article will tackle exactly that and in the process introduce you to one of the best essay writing services, that is Custom Essay Writers. But before all that, lets tackle your question, “At What Price Is The Elasticity Of Demand Equal To *”?
Well, the elasticity of demand can be measured mathematically as the ratio between the rates of change in quantity demanded versus the ratio of change of the price of a commodity.
Basically we have the following:
Change in Qty Demanded = (Q2 – Q1)/((Q2+Q1)/2) X 100
Change in Price = (P2 – P1)/((P2+P1)/2) X 100
Elasticity of Demand = Change in Qty demanded /Change in price
By having this understanding of the way elasticity is calculated, then it becomes very easy and obvious to make the price the subject of the formulae. We can do whatever the elasticity is we equate it to the other variables and have the price P2 as the unknown variable.
This then becomes a very easy algebraic formulae to solve.
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Price Elasticity Of Demand Measures
There are many who wonder precisely what the elasticity of demand measures in the economy. Well, each type of the demand elasticity will ultimately point to a very unique business and economic condition of any market. On this we shall be looking at the 5 major bands of elasticity values that present on a day to day basis and on a market to market basic for different commodities. Below is an exhaustive summary of the major pointers as seen in the diagram above.
Perfectly Inelastic Demand
Perfectly inelastic demand point to a market where the quantity of a product that is demanded is not really affected by the price. This is always a huge win for Veblen goods as well as luxury goods. Essentially we are looking at a price elasticity of Zero. When Ep = 0 then it means that the price of the substance at stake is immaterial when it comes to determining how many people will eventually buy it. It can be seen as a perfectly neutral correlation between price and quantity demanded.
An example of this would be a pair of luxury diamond rings. No matter the price of the rings, the demand will remain precisely the same. Thus making the demand perfectly inelastic to price.
The second scenario on this matter is of course the inelastic demand. So what is inelastic demand? Well mathematically it is when the elasticity of demand is between 0 and 1.
Basically 0 < Ep < 1
This means that the change in the price of a commodity cause a very small change in the quantity demanded. Essentially the change can be termed as negligible and not writing home about. It can also be attributed to imperfect markets.
Unit Elastic demand
Thirdly, we have a form of Elasticity of demand when the elasticity is termed as unitary. Unitary elasticity means that the value of elasticity is mathematically equal to 1.
Ep = 1
This means that the quantity demanded changes at the same rate as the price. For instance, if the price dropped by say 10%, then the quantity demanded would ultimately increase by 10%. This means that the income of the suppliers remain constant through many economic phases and the different prices. Unitary demand also means that the producers have a sale ceiling that is constant no matter the pricing of their goods. Unitary elasticity of demand of goods is mostly common with goods that have ready substitutes and comprise of a small portion of the household income.
Elastic demand can be defined mathematically as:
1 < Elasticity Demand < ∞
Basically, the elasticity of demand varies between 1 and infinity. This alone implies that a small change in price causes a negative change in the demand. Essentially, majority of market goods follow this model. The more the quantity demanded the lower the price. The higher the price, the lower the quantity demanded.
Perfectly Elastic demand
Finally we have a perfectly elastic demand. Mathematically:
Elasticity Demand at A Price = X
This implies that the quantity demanded will vary infinitely as the price.
Price Elasticity Of Demand Formula
As mentioned earlier, the formula for the price elasticity of demand is very simple. We measure both the percentage changes in the demand as well as the corresponding prices. The PED or the Price Elasticity of Demand is thus the percentage change in quantity demanded divided by the percentage in the price.
With these in action, we have a very clear guideline on how to calculate every variable. Note also that in many occasions, the examiner may give you the elasticity as well as the quantity and demand for the price. Or give you the elasticity and the demand and ask for the price. This is basically what this article is all about. It seeks to answer the question of “At What Price Is The Elasticity Of Demand Equal To *”?
How To Calculate Price Elasticity Of Demand From Demand Function
On several instances, you may be faced with a problem asking how to calculate the price elasticity of demand from the demand function. Well, that is not very hard. Remember that the demand function is the generator of different sets of demand and price values. Given the function it becomes easy to integrate the function mathematically and come up with various spot prices as well as the quantities.
The elasticity of the demand can thus be determined by first calculating the rate of change of the quantity demanded. Secondly you can mathematically calculate the rate of change of the price on the same range of time. Finally, the simple thing will be to perform the final division.
If your demand formulae is purely algebraic, you may need to compile this as a formula rather than a value. This will be perfectly okay. In case you have difficulty in making head or tail of these, we are here to help. Please engage us for help in taking your online classes, help with your assignment as well as help with your dissertations and research writings.
Perfectly Elastic Demand
When it comes to perfectly elastic demand, we can term it as when price and quantity have zero correlation. Essentially, we are looking at constant price despite various levels of quantity demanded. This is a huge win if you get it.
On the converse, a perfectly inelastic demand comes into play when you have a zero reaction to the quantity demanded by diverse changes of price. Essentially, this graph is orthogonal to the perfectly elastic demand curve.
Price Elasticity Of Demand Examples
There are many price elasticity of demand examples that we can quote. Essentially, all of them have one thing in common. There is a change in price which is supposed to commensurate a change in demand and vice versa. The economists use these various changes to determine if the changes in demand and price affect each other predictably. If the model can be well predicted, then that is all, the goal will be to determine the use of these models at various levels to have a complete understanding of prevailing market dynamics.
Price Elasticity Of Demand Formula Examples
- Colton and company recently lowered the pricing of their gaming mouse from $30 to $24. The firm predicted that the sales are likely to increase from the current 14,000 units to 30,000 units.
Q: What is the PED (price elasticity of demand)?
Q: What form of PED are we looking at?
Change in the price is: -20%
Change in the demand is: 114%
PED = 5.7
The demand of the price is elastic
- A woven bag maker has blown up the prices of their wares by 6%. In exchange, the sales dropped by 16% as a result of the price change.
Q: What is the PED (Price elasticity of demand?)
Q: Comment on the PED
Q: What will happen to the total revenue in the firm?
Change in price: 6%
Change in demand: 16%
PED = 2.6
The demand is elastic
The overall revenue of the firm will drop.
Income Elasticity Of Demand
Income elasticity of demand is a measure of the effect of income levels of a household to the demanded quantities of particular commodities. Essentially we are looking at the answer to the question, does an increase in disposable income of the household affect their demand for a particular good or service? If the answer is yes, then what is the relationship? Is it:
- Perfectly Inelastic to disposable Income
- Inelastic to disposable Income
- Unitary to disposable Income
- Elastic to disposable Income
- Perfectly Elastic to disposable Income
The answer to this question will often help the manufacturer and supplier firms in determining where to sell their wares and to which group of people. The models will also guide their expectations in terms of what to expect given a change in disposable income in their target market.
Unitary Elastic Demand
Unitary elastic demand basically refers to a state where a change in income brings about a corresponding similar change in the demand of a good. This implies that the revenue of the firm remains unchanged. While the price increases the demand decreases at the same rate, meaning the coefficient of elasticity is 1.