Submitted by: Submitted by jadextacy
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Words: 493
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Category: Societal Issues
Date Submitted: 02/12/2013 07:07 AM
ELASTICITY OF DEMAND @ GLANCE
1. PRICE ELASTICITY OF DEMAND
PRICE-ELASTIC
If the % change in quantity demanded is greater than the % change in price it has a major effect. In this case demand is very responsive to a change in price. It is called elastic.
PRICE-INELASTIC
If the % change in quantity demanded is less than the % change in price it has a minor effect. In this case demand is not very responsive to a change in price. It is called inelastic.
Features:
|PRICE ELASTIC GOODS |PRICE INELASTIC GOODS |
|Lots of substitutes |Very few substitutes |
|Luxury |Necessity or addictive |
|Little loyalty to the product |Strong brand loyalty e.g. Sony |
|Often expensive |Usually not too expensive |
WHAT TO DO AS A BUSINESS?
PRICE ELASTIC GOODS
- Try not to increase the price as the business will collect less revenue. The fall in demand will outweigh any extra price increases
- Cut prices a little as more people will buy your product.
PRICE INELASTIC GOODS
• It should be possible to increase the price a bit and still collect extra revenue. There will be a slight fall in customers but enough people will pay the extra price.
• It is not worth cutting the price. It wont attract many new customers
• These goods are often taxed heavily because people continue to buy them as they are considered to be necessities e.g. petrol, cigarettes
2. INCOME ELASTICITY OF DEMAND
This measures the relationship between a change in income and the change in demand for a product. For example if you have a pay rise of 10% which goods would you buy more of and which goods would you buy less of?
|Examples | |...