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Elasticity Of Demand Essay

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PRICE ELASTICITY OF DEMAND
DEFINITION
Price elasticity of demand can be defined as
“A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in the price.”
Price elasticity of demand is usually a negative number.
COMPUTING PRICE ELASTICITY OF DEMAND
Economists compute the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in the price. That is,
Price elasticity=%change in quantity demanded/%change in price.
For example suppose that a10 percent increase in the price of an ice cream cone causes the of ice cream you buy to fall by 20 percent. We calculate your elasticity of demand as
Price …show more content…

Luxuries versus necessities
3. Time horizon
4. Definition of market
AVAILABILITY OF CLOSE SUBSTITUTE
Elasticity depends on the availability or non-availability of substitute. In case of commodities which have substitute, elasticity will be highly elastic. In other word goods with close substitute tend to have more elasticity because it is easier for consumers to switch from that good to others. For example, butter and margarine are easily substitutable. But for goods which have no substitute elasticity will be inelastic.
LUXURIES VERSUS NECESSITIES
Elasticity depends on the nature of the commodity i.e. whether a commodity is a necessity, comfort or luxury. Normally the elasticity for necessities like salt, rice, medicine etc. is inelastic. On the other hand, the elasticity for comforts and luxuries is elastic. For example when the price of a doctor’s visit rises, people will not dramatically reduce the number of times they go to the doctor, although they might go somewhat less often. By contrast, when the price of sailboats rises, the quantity of sailboats demanded falls substantially. The reason is that most people view doctor visits as a necessity and sailboats as a luxury.
TIME

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