Essays on Price Elasticity of Demand Assignment

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The paper "Price Elasticity of Demand" is a wonderful example of an assignment on macro and microeconomics. The price elasticity of demand (PED) measures the sensitivity of quantity demanded to changes in price. The relationship is measured as the ratio of percentage changes between quantity demanded of a good and changes in its price. Water is a good example of a good whose quantity demanded does not change radically with a price. On the other hand, sugar’ s quantity demanded changes drastically as the price of sugar increases as there are many substitutions which consumers may switch to. Decreasing prices are usually accompanied by an increase in the quantity demanded (there are a few exceptions to this case).

Now, the demand for a good is relatively inelastic when the quantity demanded is not greatly affected by a change in price as in the case of water. In the opposite case, the demand for a good is said to be relatively elastic. Now, when the price elasticity of demand for a good is inelastic, the percentage change in quantity demanded is smaller than that in price.

Hence, the raised price causes the total revenue to increase, and vice versa. Similarly, when the price elasticity of demand for a good is elastic, the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue of producers falls, and vice versa. Three other cases of elasticity are given below. When the price elasticity of demand for a good is 1, the percentage change in quantity is equal to that in price. This rarely happens in real life. When the price elasticity of demand for a good is perfectly elastic i. e.

the mathematical elasticity is infinite, any increase in the price will reduce the quantity demanded to zero which would cause the total revenue to fall to zero. This case only happens to good whose value is closely defined with no chances of variability e. g. a $100 bill is worth $100 at all times. When the price elasticity of demand for a good is perfectly inelastic, changes in the price do not affect the quantity demanded for the good. The demand curve is a vertical straight line; this violates the law of demand.

(Wikipedia, 2008) As we have seen, it is not possible for a good to be elastic and inelastic at the same time, so either I or my colleague is right.

References

1. Wikipedia, The Free Encyclopedia “Price Elasticity of Demand” (2008) September 26, 2008 http://en.wikipedia.org/wiki/Price_elasticity_of_demand

2. Wikipedia, The Free Encyclopedia “Sunk Cost” (2008) September 26, 2008 http://en.wikipedia.org/wiki/Sunk_cost

3. Wikipedia, The Free Encyclopedia “Price Elasticity of Supply” (2008) September 26, 2008 http://en.wikipedia.org/wiki/Price_elasticity_of_supply

4. Wikipedia, The Free Encyclopedia “Cross Elasticity of Demand” (2008) September 26, 2008 http://en.wikipedia.org/wiki/Cross_elasticity_of_demand

5. Wikipedia, The Free Encyclopedia “Marginal Cost” (2008) September 26, 2008 http://en.wikipedia.org/wiki/Marginal_cost

6. Wikipedia, The Free Encyclopedia “Marginal Product” (2008) September 26, 2008 http://en.wikipedia.org/wiki/Marginal_product

7. Agricultural and Resource Economics (2006) “The efficient level of pollution and the Coase Theorem” University of California, Berkeley

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