The price elasticity of demand not only enables an organization to analyze economic problems, but also helps in solving managerial problems, not related to pricing decisions.
This type of demand is an imaginary one as it is rarely applicable in our practical life. Thus it is also called zero elasticity.
If the demand is elastic, a Price elasticity of demand and practical change in the price brings about a considerable change in the quantity demanded, but in the case of inelastic demand this consequential change in demand is relatively small.
If costs were close to the price of vanilla ice cream, profits would be almost zero. For example, the demand for electricity for domestic users is inelastic; therefore, the price of domestic electricity is high, whereas the demand for industrial electricity is inelastic.
Effects of Changes in Price Upon Demand: Furthermore, the concept is a useful tool in taxation. Government can impose higher taxes on goods with inelastic demand, whereas, low rates of taxes are imposed on commodities with elastic demand. The price elasticity of demand helps an organization to determine the price of its products in various circumstances.
The general principle is that the party i. It is also called less elastic or simply inelastic demand. The demand curve DD is a rectangular hyperbola, which shows that the demand is unitary elastic. The percentage change in total revenue is approximately equal to the percentage change in quantity demanded plus the percentage change in price.
As a result, firms cannot pass on any part of the tax by raising prices, so they would be forced to pay all of it themselves. Refers to the fact that under monopolistic market conditions, the price of products is determined only on the basis of price elasticity of demand.
This is often the case for different product substitutes, such as tea versus coffee. The demand curve DD is a vertical straight line parallel to the Y-axis.
Such situations are as follows: As a result, the relationship between PED and total revenue can be described for any good: On the other hand, a monopolist charges less prices from consumers whose demand is elastic.
So, the concept is relevant to the decisions relating to business pricing and profits. For example, printers may be sold at a loss with the understanding that the demand for future complementary goods, such as printer ink, should increase.
This point may now be illustrated. Price elasticity of demand helps in determining price to be paid to the factors of production. The resulting curve is downward-sloping; thus, increases in price result in a fall in demand for a given product. Hence, as the accompanying diagram shows, total revenue is maximized at the combination of price and quantity demanded where the elasticity of demand is unitary.
For example, if the price of coffee increases, the quantity demanded for tea a substitute beverage increases as consumers switch to a less expensive yet substitutable alternative. It shows that the demand remains constant whatever may be the change in price.
It is also called unitary elasticity.In case of elastic demand, he will lower the price in order to increase, his sale and derive the maximum net profit. Thus we find that the monopolists also get practical advantages from the concept of elasticity.
Cross elasticity of demand is calculated with the following formula: Substitute Goods The cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases.
When the price elasticity of demand for a good is relatively elastic (−∞. 1 Price Elasticity of Demand Example Questions Review: First, a quick review of Price Elasticity of Demand from lecture on 02/19/ The definition, of Price Elasticity of Demand (PED) is. Price elasticity of demand seeks to explain how a certain product’s quantity demanded by the market responds to variations in its price.
The following points highlight the nine main practical applications of the concept of price elasticity of demand. The uses are: 1. Effects of changes in price upon demand 2.Download