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Environmental Issues and Elasticity

EnvironmentalIssues and Elasticity

Demandrefers to the amounts of goods that consumers are willing and able tobuy at a specific price in a given time. Therefore, the priceelasticity of demand (PED) refers to the responsiveness of demand tochanges in the price of a commodity. However, the price elasticity ofdemand is mostly a negative figure because of the negativerelationship between prices and the quantities demanded. An increasein price always leads to a decrease in the amount demanded.

Determinantsof Price Elasticity of Demand

Availabilityof substitutes is one of the factors. Assets that have closesubstitutes are likely to have greater PED (Boyes et al., 2012). Itimplies that if prices for these commodities increase, consumers willswitch to the close substitutes that might not have changed theirprices. On the other hand, commodities that do have close substituteswill have lower PED or be inelastic since the consumer will have tobuy the supplies irrespective of how much the price has changed(Nadar, 2013). Also, the proportion of income that goes to theconsumption of a particular good determines PED. Commodities thatconsume a large percentage of a consumer`s income usually havegreater PED because consumers pay a lot of attention when purchasingthem and the buyers will be keen to look for the close substitutesavailable. Moreover, the degree of necessity influences the PED of acommodity. Goods that have a higher degree of necessity usually havelower PED because the buyers must consume the products in spite ofthe changes in price. On the other hand, luxuries have a greaterprice elasticity of demand because consumers can stop consuming thecommodities when the prices increase.

Elasticdemand is one that does change when the prices of a good change(Stonecash, 2012). For instance, the demand for cars is likely to godown if the prices increase. Inelastic demand implies that thequantities bought for a particular good do not change even if theprices decrease or increase. For example, the amounts of salt thatare demanded by household will remain constant even if the pricesdrop.

Calculationof PED = % change in quantity demanded divided by % change in price

Q1.The cost of a laptop increases by 20%, and there is a 40% drop in thequantity demanded

Ifprice increases by 20% and demand for laptops fell by 40%

ThenPED = -40/20 = -2

PED= -2

Q2.The cost of cigarettes increases by 10%, and there is a 5% drop inthe quantity demanded.

Ifprice increases by 10% and demand for cigarettes fell by 5%

ThenPED = -5/10 = -0.5

PED= -0.5

Fromthe above examples, cigarettes are more elastic while laptops areleast elastic. This is because the PED of cigarettes that is -0.5 ishigher than the PED of laptops which at -2.

UsingKnowledge of Elasticity

PEDis vital to businesses because it helps in determining the strategythat a company will use to increase revenues (Nadar, 2013). Forexample, in this case, the Gourmet coffee, gasoline, and bridge tollsbusinesses can increase their incomes by raising the prices sincethey have a lower PED. However, cell phones and Beachfront businesscannot increase their revenues by increasing prices since they have asmall degree of necessity as well as a great PED.

Thebest time to raise prices of flowers is when the demand is high forinstance, during the Valentine’s Day. This is because the degree ofnecessity during such time is high. The elasticity in flowers is highbecause people can do without them if they become expensive.

References

Boyes,W. J., &amp Melvin, M. (2012). Microeconomics.Mason, OH: South-Western Cengage Learning.

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Nadar,E. N. (2013). Managerialeconomics.New York: Prentice-Hall.

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Stonecash,R. E. (2011). Principlesof macroeconomics.South Melbourne, Vic: Cengage Learning.