Economics

Principles of Economics

Suppose the price elasticity of demand for textbooks is two & the price of the textbooks is increased by 10%. By how much does the quantity demand fall? Enter the result and discuss reasons for the fall in quantity demand?

Definition of ‘Elasticity’:-

A measure of a variable sensitivity to a change in another variable. In economic, elasticity to refers the degree to which individuals (consumer/producers) change their demand / amount supplied in response to price or income changes.

Definition of ‘Price elasticity demand’:-

A measure of the relationship between a change in the quantity demanded of a particular good and change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity

Calculated as:

% Change in Quantity Demand for Product A

% Change in Price for Product A

= PED x % change in price for product A

PED of Books= 2,

Percentage Change in Price for Books = 10%,

So,

% change in demand for books

= 2 x 10%

= 20%

The fall in the price Quantity Demand of the Books will be 20%.

Price Elasticity of Demand:-

Price inelastic – a change in price cause a smaller % change in demand.

Price elasticity _ a change in price cause a bigger % change in demand.

Inelastic:-

We say a good price inelastic, when an in price causes a smaller % fall in demand, e.g. If the price of petrol falls 30%, but demand for petrol increases 10% the PED = -0.33.

For example:

If the price of salt increased, demand would largely be unchanged. It is only a small % income of and people tend to buy infrequently. It is good with no real substitutes at all.

Elastic:-

We say a good price elastic, when an in price causes a bigger % fall in demand. E.g. if price falls 20% and demand increases 80%, the PED = -4.0

For example:-

Tesco will be highly priced elastic but...