Tutors on net
Tutors on NetTutors on Net

Price Elasticity Of Demand And Its Applications

 Price Elasticity of Demand And Its Determinants

Price Elasticity of Demand And Its Determinants

         The law of demand denotes that a drop in the rate of a commodity hikes the volume demanded. The price elasticity of demand measures the volume demanded responds to a variation in price. Demand for a commodity is said to be elastic if the volume demanded reacts considerably to variations in price.

         Demand is said to be inelastic if the volume demanded reacts only slightly to variations in the price. The price elasticity of demand for any commodity measures how enthusiastic consumers are to shift from the commodity as its price hikes. Therefore, the elasticity reproduces the many economic, social and psychological forces that shape consumer tastes. Depending on familiarity, nevertheless we can denote common rules about what ascertains the price elasticity of demand.

  1. Accessibility of close surrogates

         Commodities with close surrogates lead to have more elasticity of demand as it is simple for consumers to change from that commodity to others. For instance, cheese and butter are meagrely surrogatable.

         A meagre hike in the price of butter presuming the price of cheese is kept fixed creates the vending of butter to drop and cheese to rise. Divergent to this, as eggs are without a close surrogate, the demand for eggs is less elastic than the demand for butter.

  1. Requirements Versus Luxuries

         Requirements lead to have inelastic demand, whilst luxuries have elastic demands. When the consultation charges for visiting a doctor hikes patients may not decrease the number of times they visit. Likewise, travel by flight when the rates hike may decrease considerably unlike visiting a doctor as it is requirement whilst travel by flight is a luxury which can be alternated with trains.

         Certainly, whether a commodity is a requirement or a luxury is based not on the inherent possessions of a commodity but on the preferences of the consumers. For passionate flight riders with less anxiety over their health, flights might be a requirement with inelastic demand and doctor visits a luxury with elastic demand.

  1. Definition of the Marker

         The elasticity of demand in any market is based on how we sketch the limits of the market. Narrowly explained markets lead to have more elastic demand than extensively defined markets as it is simple to determine close surrogates for narrowly explained commodities.

         For instance, houses have fairly inelastic demand as there are no commodity surrogates. Whilst chocolates a narrower category has a more elastic demand for the reason that it is simple to surrogate chocolate with cakes other any other snack.

  1. Time Horizon

         Commodities are likely to have more elasticity of demand over longer time horizons. When the price of gasoline hikes the volume of gasoline demanded drops only slightly in the first few months. Over a period of time, nevertheless people purchase more fuel efficient autos, shift to public transportations like buses and trains and shift closer to where they work. Within several years the volume of gasoline demanded drops considerably.

Income Elasticity of Demand

            The income elasticity of demand measures how the volume demanded varies as consumer income changes. It is computed as the percentage change in volume demanded divided by the percent change in income and it is given by,

            Income elasticity of demand  =          Percentage change in volume demanded
                                                                             Percentage change in Income

            Most commodities are normal. Higher income increases the volume demanded. As volume demanded and income travel in the same direction, normal commodities have positive income elasticities.

            A few commodities such as bus rides are inferior commodities. Higher income lowers the volume demanded. As volume demanded and income shift in opposite directions, inferior commodities have negative income elasticities.

            Even among normal commodities, income elasticities differ considerably in dimension such as food and apparels, are likely to have small income elasticities as consumers regardless of how low their incomes opt to purchase some of these commodities.

            Luxuries like platinum, villa are likely to have large income elasticities as consumers feel that they can do without these commodities altogether if their income is too low.

The Cross Price Elasticity of Demand

            The cross price elasticity of demand measures how the volume demanded of one commodity varies as the price of another commodity varies. It is computed as the percentage change in volume demanded of commodity 1 divided by the percentage change in the price of commodity 2 and is given by,

Cross price elasticity of demand         =          Percentage change in Volume Demanded Of commodity 1
                                                                              Percentage change in the Price of Commodity 2

         Whether the cross price elasticity is a positive or negative number is based on the two commodities are surrogates or complements. Surrogates are commodities that are typically used in place of another such as chocolates and cakes.

         A hike in chocolate rates induces people consumers to opt for cakes. This is for the reason that the price of cakes and the volume of chocolates demanded move in the same direction, the cross price elasticity are positive.

         Alternatively, complements are commodities that are typically used mutually such as cars and petrol. In this crate, the cross price elasticity is negative representing that a hike in the rate of cars decreases the volume of petrol demanded.

Online Live Tutor Cross Price Elasticity of Demand:

         We have the best tutors in Economics in the industry. Our tutors can break down a complex Cross Price Elasticity of Demand problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Cross Price Elasticity of Demand concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Cross Price Elasticity of Demand tutoring and experience the quality yourself.

Online Price Elasticity of Demand And Its Determinants Help:

         If you are stuck with an Price Elasticity of Demand And Its Determinants Homework problem and need help, we have excellent tutors who can provide you with Homework Help. Our tutors who provide Price Elasticity of Demand And Its Determinants help are highly qualified. Our tutors have many years of industry experience and have had years of experience providing Price Elasticity of Demand And Its Determinants Homework Help. Please do send us the Price Elasticity of Demand And Its Determinants problems on which you need help and we will forward then to our tutors for review.