Determination of price elasticity of demand. Uses of Price Elasticity of Demand in Business Decision Making 2019-02-11

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Price Determination & Elasticity

Some people will choose to not buy a car if its price increases by 10%, but are unaffected by an increase of 10% in the price of a bag of salt. If governments place more taxes on cigarettes, the demand will not drop appreciably, until taxes become extremely high. That is why their demand is inelastic. Technology: Advances in technology increase productivity in the manufacturing processes, making goods more profitable and shifting the supply curve to the right. This way, two or more products which are produced from single manufacturing process may also have different nature of elasticity. Thus, the demand for lubricating oil tends to be inelastic. After you complete each lesson, take the optional quiz to see what you have learned! Determinants of Elasticity of Demand Apart from the price, there are several other factors that influence the elasticity of demand.

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What Are Four Determinants of Price Elasticity of Demand?

On the other hand, if the price of Campa Cola falls, many consumers will change from other cold drinks to Campa Cola. In this way, we saw that the same product can be elastic in one market and inelastic on the other. You'll also use the income elasticity of demand formula and learn why income sometimes affects demand. Now, if the price of lubricating oil goes up, it will mean a very small increase in the total cost of running the automobile, since the use of oil is much less as compared to other things such as petrol. However, after two years, they have the ability to move closer to work or school, arrange carpools, use public transportation, or buy a more fuel-efficient car.

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12 Importance of Price Elasticity of Demand

In the same way, petrol has inelastic demand but car itself has only elastic demand. A price increase in salt will have little effect on demand. Numerous factors enter the economic equations that determine equilibrium prices; marketers have to understand the pricing dynamics in their markets to develop effective pricing strategies. The relationship is studied by studying the. Discover their effects and determine which ones are legitimate tools and which ones are illegal.

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Price Elasticity of Demand

There are several factors that affect the price elasticity of demand for a product: The number of close substitutes for a good The more close substitutes in the market, the more elastic is demand because consumers can easily switch their demand if the price of one product changes relative to others. Possibility of postponement of purchase: If the use or purchase of a commodity can be postponed for some times, then the demand of such commodity will be elastic. Such as the higher range products are usually bought by the rich people, and they do not care much about the change in the price and hence the demand for such higher range commodities is said to be inelastic. Price elasticity of demand can be a useful tool for businessmen to make crucial decisions like deciding the price of goods and services. The greater the possibility of substitution, the greater the price elasticity of demand for it. The reason is that in the long-run consumer can change their habits and consumption pattern.

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How to Determine the Price Elasticity of Demand

Demand tends to be more elastic if the time involved is long. Price Determination and Elasticity - Chapter Summary Our instructors will introduce you to the concepts of pricing in microeconomics. Thus from the above discussion, it is clear that in first place, it is difficult to know whether the demand for any good is elastic or less elastic. Nature of change Effect on quantity demanded and hence on demand curve Measure of sensitivity Tastes and preferences individual increase in preference positive, hence expansion of demand curve Tastes and preferences individual decrease in preference negative, hence contraction of demand curve Price of substitute good individual increase in price positive, hence expansion of demand curve see , also Price of substitute good individual decrease in price negative, hence contraction of demand curve see , also Nature of substitute good individual better substitution ambiguous. Water: Water is a necessity. The burden of any tax is typically shared between consumers and suppliers. To illus­trate, milk has several uses.

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Main Factors which Determines the Price Elasticity of Demand for a Commodity

So no matter how you learn, all the information you need is provided. If a flood gives the same pleasure and satisfaction in place of the consumption of another commodity, it is called a substitute commodity. For example, what is a luxury to a poor man is a necessity to the rich. A change in the price of high-priced commodities will not generally affect the demand of rich consumers. Addictive products may include tobacco and alcohol.

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What Are Four Determinants of Price Elasticity of Demand?

The Availability of Substitutes 2. For example, the introduction of cell phones eliminated consumer preferences for pagers. Thus, the demand for such products is said to be elastic. Thus the demand for habitual commodities is fairly inelastic. But in case of those commodities where marginal utility is equal to price, and the consumer does not get any surplus. The monopolistic market lacks competition. The supply curve will shift to the left.

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9 Main Determinants of Price Elasticity of Demand

Also, the lower range commodities have inelastic demand because these are already low priced and can be bought by any sections of the society. Importance in the determination of factors prices: Factor with an inelastic demand can always command a higher price as compared to a factor with relatively elastic demand. Note that the vertical difference between supply curve S1 and supply curve S2 is 50 cents the increase in the cost of supplying the gasoline. On the other hand clothes and durable items take away a large portion of the income. The poor people with lower incomes buy always only the minimum requirements and, therefore, they are induced neither to buy more at a lower price nor less at a higher price. Therefore, the organization is supposed to sell commodities at lower prices than charged by shopkeepers in the other bazars.

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Section 3: Determinants of Price Elasticity of Demand

Thus, each of the determinants of individual demand is also a determinant of market demand. You can test out of the first two years of college and save thousands off your degree. Price determination of joint products Joint products are various products generated by a single production procedure at a single time. Determination of price The primary objective of any firm is to earn profit or increase revenue. At that price, customers purchase 2,000 bottles per week. The luxury of the past may become a necessary of today.

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Determinants of demand

Consider a product where the demand is inelastic: gasoline. If the demand is inelastic, the terms of trade will be in favour of the seller country. Therefore, while determining the prices of these products their elasticity of demand is considered. As price went up, quantity demanded went down, or vice versa. Demand could shift between the two substitutes depending on the relative prices. In case of long period, elasticity of demand will be elastic while in the short period, it will be inelastic. A monopolist while fixing the price of the market has to determine whether its product is of elastic or inelastic nature.

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