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The Price Elasticity of Demand

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Nowadays, it is evident that the concept of elasticity is an inevitable part of creating a proper business environment and guaranteeing success for a company. The article AS Markets & Market Systems: Price Elasticity of Demand provides all principal notions concerning this concept; the article can be divided into several sections; the first one gives a definition of elasticity as a microeconomic phenomenon. In accordance with the authors of the article, two variables should be taken into account: the independent and the dependent ones whereas elasticity must be considered as a responsiveness of demand concerning the change of the product price. This is the reason why the price elasticity of demand can be calculated only if both notions are known. The formula of computing it is the following:

The second part of the article deals with the classification of the price elasticity of demand. According to the authors, if demand is perfectly inelastic, it does not change even if the product price varies. In this case, the vertical demand curve can be observed. If the price elasticity of demand is between 0 and 1, demand is considered to be inelastic. It is of common knowledge that, proportionally, the demand change is smaller than the price percentage change. If the price elasticity of demand is equal to 1, it means that the percentage demand change is equal to the percentage price change. Demand is denoted to be unit elastic. If the price elasticity of demand is less than 1, elastic demand is present. The percentage demand change is larger than the percentage price change.

The third part of the article focuses on the determinants of the price elasticity of demand. They include the number of close substitutes for a good (often, it is also nominated as uniqueness of the product). It is evident that if the product or service can be substituted by some other products or services, there is no reason to increase the price as citizens have an opportunity to choose an other product, which is similar to it. The authors provide an example of a variety of holiday resorts which makes this market more than competitive whereas the consumers of it can easily substitute one of them if its price increases. On the other hand, the cost of this substitution can be quite expensive; it can also put an impact on the consumer decision.

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The necessity of the product as well as the income of a consumer influences the price elasticity of demand. If an income of a person is quite low, it is obvious that he/she can make do without any products, which are of no enormous importance for his/her household. Moreover, luxuries are not affordable for all citizens; this is one of the key factors which influence the price elasticity of demand.

Time is another crucial issue, which puts an impact on the value of the price elasticity of demand. If the reduction in quantity demanded is expected to be present in a short period of time, the response is considered to be quite small whereas it is going to be much greater if the consumers are given a year to respond to the change of price.

The authors highlight the price and the quantity demanded as the factors of movements along a demand curve, and several cases are observed in the article. First of all, if the demand curve is downward-sloping, the price as well as the quantity demanded is denoted to move in opposite directions whereas the price elasticity of demand is negative. If the percentage change in price is positive, it implies a negative percentage change in the quantity demanded. The habitual consumption of the product as the source of influence on the change of the price elasticity of demand is taken into account in the article. If the item is an inevitable part of any household, it is natural that it must be bought even if the price increases. If the thing or a service is not so urgent, people can reduce the quantity demanded in this case.

Furthermore, the authors differentiate demand as peak and off-peak. In case of peak time, the price is admitted to be inelastic. For instance, on Fridays, the train fares are likely to be higher.

The last determinant of the price elasticity of demand provided in the article is the of the product definition. For example, as a rule, demand is inelastic if it relates to beef or petrol. However, demand of specific brands is denoted to be more elastic.  

In conclusion, it is necessary to notify that the article under review is of enormous significance as it provides only the necessary data. It is of common knowledge that each businessman or economist has to understand the concept of elasticity, and the price elasticity of demand in particularly, its impact, the ways of computing it, and the prerequisites of it in order to lead a successful business policy. In numerous cases, it is essential to make one’s mind concerning either the increase or the decrease of the price, and it is impossible to make a right choice without understanding the concept of elasticity. Moreover, the data under examination is indispensable for understanding the course of microeconomics in the whole. For the purpose of making all notions observed in the article clearer, the authors used several illustrative and graphic examples.

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