Elasticity

According to the textbook chapter 4 Elasticity. As we know that elasticity is defined as a measure of the responsiveness of people to changes in economic variables. There are three types of price elasticity of demand to measure responsiveness to price changes such as elastic, inelastic and unit elastic demand.

     Diagram 1 

  Diagram 1 show that is an elastic demand, it means a change in the price will cause more percentage change in quantity demanded. When the price elasticity of demand is elastic, the price decrease will cause the total revenue increase. Examples the goods of elastic demand such as luxuries good. The firms can increase the quantity demanded when they lower the price of the product, and makes more profits and revenues. Examples like the price of the Prada handbag decrease will cause the quantity demanded increase.

  

Diagram 2

     Diagram 2 show that is an inelastic demand, it means a change in price will cause less percentage change in quantity demanded. When the price elasticity of demand is inelastic, the price decrease will reduce the total revenue. Examples the goods of inelastic demand such as necessities good. The firms reduce the price of the product can only cause a little change in the quantity demanded and makes less profits and revenues. Examples like individual will keep purchase rice no matter how much the price it is, because they need it to survive.

Diagram 3

     Diagram 3 show that is unit elasticity, it means a change in price and the percentage change in quantity demanded are the same. When the price of demand is unit elasticity, the price increase or decrease is not changing the total revenue. The firms will not do anything at this moment, because the price is equal to the percentage change in quantity demanded and they get profits and revenues also.

Article about Elasticity

The Elasticity of Demand.

The Law of Demand states that the lower the price of a good or service, the more of it any one person will buy. For example, When cars are expensive, a family only has one. When cars are cheap, everybody gets their own car.

The question is, how much does the price of something have to rise or fall to make a difference. That’s the Elasticity of Demand. For example:

Cigarettes have very inelastic demand curve. They are addictive, so when you want them, you want them. Price goes up, still gonna smoke. Kidney Dialysis is inelastic. Unless you get another kidney, dialysis is perfectly inelastic. You get dialysis or you die.

Written by: Wong Kean Tong 0315520

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