- May 15, 2020
Price Elasticity of Demand
PriceElasticity of Demand
PriceElasticity of Demand
PriceElasticity of Demand is regarded as the measure of the relationshipbetween the amount of the product demanded and its price, with awider focus on the effect of the alteration in price and quantitydemanded. The concept is often used in analyzing price sensitivityand its effects. If a product is ‘elastic,’ it is assumed to bereceptive to price variations, and this will be described by amassive shift in the quantity demanded (Diehl, Maxcy, & Drayer,2015). An inelastic product is a product that does not have a highresponse to the change in price. Therefore, this paper will focus onidentifying a particular product, such as Airline tickets andanalyzing its elasticity to develop a wider comprehension of theassociation between price and quantity needed. The discussion willfurther present the various elements that influence the priceelasticity of demand for a product in an economy at a given period.
PriceElasticity of Demand is equivalent to the variation in quantityrequired divided by, the adjustment in price. Therefore, an increasein the price of an inelastic product will cause a change in theamount required. Companies charge advanced if the request (demand)for the product is price inelastic. The total revenues will neitherincrease nor decrease. However, a reduction in the price of anelastic good will increase the amount demanded significantly (Diehl,Maxcy, & Drayer, 2015). Frequently, these costs are reduced insmall proportions due to their high price elasticity. Price plasticproducts have a substantial effect on the revenues of the economies.A reduction in the price of an elastic product will cause increasedpatterns of spending and affect the investments and profits in theeconomy.
Thereexist various factors that influence the amount to which the demandof product varies in response to the price. These factors include thefollowing.
Availabilityof substitutes for the products: – the number required has exhibitedhigh elasticity towards products that are close substitutes. Forinstance, an airline tickets from organization X have a replacementfrom structure Y that is in forceful competition for market share. Ifthe price of air tickets of firm X decreases, the quantity demandedfor those from company Y will likely change (decrease). Therefore,the airline tickets are an elastic price product in the economy.
Thenumber of times consumers have to adjust a difference in price: – Theamount of time that consumers use in adapting to a change in priceaffects the quantity demanded either negatively or positively. Usersof airline tickets may take a short period to adjust to a decrease inthe cost (Gwartney et al., 2010). Alternatively, users may take alonger time to adjust to the change of price, which will cause a slowshift in the quantity demanded.
Proportionof the consumer’s budget spent on the product /service: – If theproduct utilizes a small portion of the consumer’s budget, then adecrease in the price of the airline ticket will trigger an increaseddemand resulting in high quantity demanded.
Product/serviceif a luxury or necessity: – Necessities have been defined to haveinelastic demand while luxurious goods trigger the change in price.
Inconclusion, this paper evaluated the price elasticity of demand usingthe example of an airline ticket. The paper concludes that differentfirms need to evaluate the price elasticity of demand for variousproducts to understand its impacts on pricing and sales. The priceelasticity of airline tickets is very high due to the response itelicits on the quantity demanded.
ReferencesDiehl,M., Maxcy, J., &Drayer, J. (2015). Price elasticity of demand inthe secondary market: Evidence from the National Football League.Journalof Sports Economics,31-44.
Gwartney, J. D., Stroup, R. L., Sobel, R. S., & MacPherson, D. (2010). Economics: Private and public choice. New York: Cengage Learning.