Price elasticity of demand Essay Example for Free

Price elasticity of demand Essay A. Price elasticity of demand (Ed) is used to determine if percent change price increases will percent change quantity demanded decease. In price elasticity of demand (Ed) there are three possible coefficient categories that can result; elastic, inelastic and unit elastic. Key components to remember when determining coefficient category, the threshold is set at one, there are only absolute values, no negative numbers, and the coefficient can only be categorized as elastic, inelastic and unit elastic. To determine if the coefficient is elastic, inelastic or unit elastic they would have the following characteristics. When price elasticity of demand (Ed) is elastic the coefficient will be greater than one (Ed 1). When a percent price change occurs quantity demanded responds strongly and there will be a large change in quantities consumers purchase. There is price sensitive in this scenario. If price elasticity of demanded (Ed) is inelastic the coefficient will be less than one (Ed 1). When a percent price change occurs quantity demanded doesn’t respond strongly and there’s a small change in quantities consumers purchase. There a weak price sensitive in this scenario. Lastly, if price elasticity of demanded (Ed) is unit elastic the coefficient will be equal to one (Ed = 1).Whenever there is a percent change in price there is an equally matched percent change in quantity demanded. This scenario is rare. The following formula can be used to compute the coefficient before categorizing if it is elastic, inelastic or unit elastic: Ed= %∆Qd _______ %∆Price After plugging in the given particulars and computing an answer for the coefficient, one will determine if the answer is greater, less, or equal to the threshold of one. Then last step the coefficient will be categorized as elastic, inelastic or unit elastic. B. Cross price elasticity (Exy) helps determine how percent change increase of a good or service impact quantity  demanded of another good/service. In cross price elasticity (Exy) there are two possible categories that the coefficients can be placed in; substitutes and complements. Key components are as follows threshold is zero, there is a positive or negative distinction in the coefficient, and if the coefficient is equal to zero, this means there is no impact on the good or service. The goods or services are independent of each other. The elasticity of a good or service depends on how specifically defined is the product. For example the brand of eggs you buy vs. you buying eggs. In cross price elasticity (Exy) if the coefficient is a substitute good or service it would be greater than zero (Exy 0). The more X and Y sales increase together we know they are substitutes, the greater the substitutability between the two goods or services. In cross price elasticity (Exy) if the coefficient is a complimentary good or service it would be less than zero (Exy 0). X and Y â€Å"go together,† increase in price of one of the goods/services decrease the demand of the other, they are complementary goods/services. The larger the negative coefficient, the greater the complementary between the two goods or services. The following formula can be used to compute the coefficient before determining if it’s a substitute or complimentary good/service. Exy= %∆Qd of good Y _____________ %∆Price of good X After plugging in the given particulars and computing an answer for the coefficient, one will determine if the answer is greater, less, or equal to the threshold of zero. Then last step the coefficient will be categorized as a substitute or complimentary. C. Income elasticity (Ei) measures how responsive percent change quantity demand is too percent change in a person’s income. There are two income categories; normal goods, which are also referred to as superior, and other category is inferior good. Two key components to remember are the threshold is set at zero and there is either a positive or negative distinction in the coefficient. In income elasticity (Ei) to determine if the coefficient is normal (superior) good the threshold would be greater than zero (Ei 0). When income rises so does the demand for normal (superior) goods. But also if there is a recession normal (superior) goods are usually hit hardest.