Recently, we have been discussing the topic of Price Elasticity, specifically the elasticity of demand. Through our in-class project "Spending Analysis," the videos we have been watching, and the weekly reading, we have spent a lot of time analyzing the idea of elasticity. So, what really is price elasticity? Price elasticity of demand can be defined mathematically via the following formula: price elasticity of demand coefficient is equal to the percentage of change in the quantity demanded divided by the percent of change in the price. Broken down, price elasticity is a measure of whether or not a consumer will be willing to continue purchasing, or purchase more/less of a product, depending on variations of the product's price.
Elasticity can depend upon several things, for example, the amount of competition, how essential a product is, customer loyalty, and advertising efficiency. A product is said to be elastic if a small change in price has a large effect on the demand for the product. Intuitively, this makes sense if you think about the word 'elastic.' We would say a rubber band is more 'elastic' if it were more stretchy-- if its structure was more vulnerable to small changes. However, if a rubber band was 'inelastic' then it would not stretch much, no matter how hard you pulled it. The same applies to prices. If you change the price of an elastic product, the demand will vary greatly. However, if you change the price of an inelastic product, the demand will not shift very much.
Looking back at our mathematical formula, a product is said to be elastic if its price elasticity of demand coefficient is greater than 1, it is said to be inelastic if its price elasticity of demand coefficient is less than 1, and it is said to be unitary elastic if its price elasticity of demand coefficient is equal to 1.
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The idea of elasticity of demand plays a crucial role in the market of goods and services. It is important for companies to recognize whether or not consumers would still be willing to purchase their product if the price were to be raised. On the contrary, it is important to realize that if the price is too low, people could buy an exponentially increased amount of that same product, which could lead to a lack of profit for the company. I think it is also interesting how some items can be totally inelastic, so despite fluctuations in the price, people will buy a constant amount of the item.
ReplyDeleteI found this post really helpful. As consumers, we usually look for items offered at the best price. If we didn't care that much about the brand, then our demand for a particular item could be very elastic. For example, if I really needed toothpaste and the price of Sensodyne toothpaste was too high, then I would look for a substitute brand with a cheaper price. A change in the price of the product changes the quantity demanded from consumers. Generally, the demand for everyday goods is inelastic, but the demand for specific brands is elastic.
ReplyDeletePrice elasticity of demand is a very important concept that has many different applications. One application I found particularly interesting is the decriminalization of illegal drugs. Proponents of legalization argue that since the demand of drug addicts is highly inelastic (meaning that regardless of price, addicts will continue to buy drugs), the amount of drugs they consume wouldn't change substantially if drugs were sold in legal markets at cheaper prices. Opponents of legalization argue that although addicts' demand for drugs is inelastic, there is another market of "dabblers" whose demand is relatively elastic. Therefore, the lower prices that come with selling drugs legally would increase dabblers' drug consumption.
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