Price Elasticity Demand

Economic is the study of the production, distribution and consumption of good and services and also economic considers how society provide for its need. Its most basic need is survival which requires food, cloth and shelter. Once those are covered, it can then be looked at more sophisticated commodities such as services, personal transport, and entertainment and so on. According to American Economic Association (2017), “Economics is the study of scarcity, the study of how people use resources, or the study of decision-making. It often involves topics like wealth, finance, recessions, and banking, leading to the misconception that economics is all about money and the stock market.”

In economics, supply and demand plays a vital role in the economic

(Koutsoyiannis, 1979). Whereas elasticity of supply refers to percentage change in the quantity supply to the percentage in price. In business it takes decision regarding price or not the firm should have the idea about price elasticity demand of the product and its substitute and complements and increasing of price will be beneficial only if the demand of its product is inelastic. As the increase in price will lead to increase in total revenue in which raising price will be beneficial if the elasticity of demand for its substitute is low but if it is large, consumer will shift to other substitute as the firm raises the price for that product in which importance of elasticity of demand will help in making business decision.

Price elasticity of supply of the product and its substitute and complements and decreasing of price will be beneficial if the demand of its product is elastic. As the decrease in price will lead to increase in total revenue in which decreasing in price will be beneficial if the elasticity of supply for its substitute is high but in case if it is low, consumer will not shift to other substitute as the firm lowers the price for that

“A commodity for a person may be necessities, a comfort, or a luxury.” (Jalan, n.d.). when a commodity is necessary like food , cloth and shelter. Its demand is generally inelastic as it is required for human survival and its demand does not fluctuate much with change in price and in case of comfort like fan and refrigerator its demand is generally elastic as consumer can postpone its consumption. Where as in the luxury like AC, DVD player its demand is generally more elastic as compare to demand for comfort.

As with the demand elasticity, the most important determinant of elasticity of supply is the availability of substitutes. In the context of supply, substitute goods are those to which the factors of production can most easily be transferred. The more easily factors can be transferred from the production of one good to that of another, the greater elasticity of supply.

If the business firm is willing to take the risk demand, the elasticity of demand will be inelastic and if the firm is not willing to take the risk demand, the elasticity of demand will be inelastic. The willingness of entrepreneurs to take risk also affects the price elasticity of supply. This in turn depends on the system of incentive or disincentives. If the marginal rate of tax is very high, a price raise will not evoke much response among producers. (Suman,