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Define And Explain The Concept - College Paper

Define And Explain The Concept

Price elasticity of demand is defined as how demand changes as a result of a change in price. It can be said that if a reduction in price leads to an increase in demand then demand is relatively elastic. Elasticity
is usually negative. There is an alternative scenario where demand will increase as price does so too. This happens only in the case of Giffen goods, where elasticity is positive. The formula for price elasticity of demand is:
Percentage Change in Quantity Demanded
One determinant of price elasticity is the number and closeness of substitutes there are available for a good. The closer the goods are, the greater will be the price elasticity of demand of that good. The reason for ...

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the income effect and the more elastic the demand will be. This is the reason salt has a very low price elasticity of demand. We spend such a small proportion of income on salt that a relatively big percentage increase in the price of salt is borne by us without too much difficulty, so the income effect would be pretty small.
One other determinant of price elasticity of demand is the time period. When prices rise people may take time to adjust their consumption patterns and find alternatives. The longer the time after a price change, then, the more elastic is demand likely to be.
Income elasticity is a measure of responsiveness of the demand to a change in incomes. Income elasticity is important to firms considering the future market for their product. If the product has a high income elasticity of demand then sales are likely to expand rapidly as national income goes up, but also fall quickly should the economy move into recession. The formula for income elasticity of demand ...

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elasticity of demand is a measure of the responsiveness of demand for one product to a change in the price of a complement or substitute good. The formula for cross elasticity of demand is:
Percentage Change in Demand for Good x
Percentage Change in Price of Good y
If good y is a substitute for good x, x’s demand will rise as y’s price rises. Cross elasticity of demand will be positive in this case. If y is a complement to good x, then x’s demand will fall as y’s price rises. Cross elasticity of demand will be negative in this case. The major determinant of cross elasticity of demand is the closeness of the substitute or complement. The closer it is, the ...

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PAPER DETAILS

Added: 4/6/2008 05:34:19 AM
Category: Miscellaneous
Type: Premium Paper
Words: 1339
Pages: 5

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