Tag Archives | elasticity

Examples of Elasticity

Price elasticity of demand measures the responsiveness of demand to a change in price. see: Price elasticity of demand

  • Price inelastic – a change in price causes a smaller % change in demand.
  • Price elastic – a change in price causes a  bigger % change in demand.

Examples of price inelastic demand

inelastic-demand

We say a good is price inelastic, when an increase in price causes a smaller % fall in demand, e.g. if price of petrol falls 30%, but demand for petrol only increases 10%  the PED = - 0.33

  • Petrol – petrol has few alternatives because people with a car, need to buy petrol. For many driving is a necessity. There are weak substitutes, such as train, walking and the bus. But, generally, if the price of petrol goes up, demand proves very inelastic.
  • Salt. If the price of salt increased, demand would largely be unchanged. It is only a small % of income and people tend to buy infrequently. It is a good with no real substitutes at all. Continue Reading →

Price Elasticity of Demand – Short and Long Run

Readers Question: the Elasticity of demand for good is likely to be greater in the short run than in the long run true or false?

Elasticity of demand measures the responsiveness of demand to a change in price. See: Price Elasticity Demand 

  • Demand is price inelastic if a change in price causes a smaller % change in demand. This gives a low PED <1.
  • Demand is price elastic if a change in price causes a bigger % change in demand. This gives a high PED >1

Elasticity of Demand in Short Run

In the short run demand is likely to be more inelastic (low = less than 1).

If people are used to buying a good, then when the price goes up, they will tend to keep buying it out of habit. However, when they realise the price rise is permanent they will expend more energy and time in looking for alternatives. Therefore, over time, people are more likely to find alternatives.

Example – Windows

Also, if a firm like Microsoft increase price of windows operating system, in the short term demand is likely to be inelastic (people are used to using windows so continue to pay higher price) However, over time, people may get fed up with paying high price for windows and consider switching systems (e.g. Mac)

Also, the increase in price of windows should act as a signal (more profitable) to other firms to develop alternatives. If more alternatives come on the market, demand will become more elastic.

Price Elasticity of Demand for Petrol.

If the price of oil increases people with petrol cars will still buy petrol. However, over time people may increasingly start to buy cars which use alternative energy sources such as natural gas, hydrogen or solar panels. But it will take time to make the switch. Therefore, demand will be more elastic over time.

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