Price Elasticity of Demand. Basics of Microeconomics

Introduction

The concept of price elasticity of demand of a commodity is of great essentiality in economics as it shows how much the demand of a commodity will change as a result of price deviations (Bade and Parkin, 2001, p. 107). In other words it shows how the demand of the commodity responds to a price change. There are three common methods that are used in the computation of price elasticity namely; Total revenue method, Geometrical method and the Arc method (Bade and Parkin, 2001, p. 107). Computation of price elasticity is done based on the formula below;

Price elasticity of demand = % change in quantity demanded % change in price of the commodity

This computation may be graphically represented as shown in the graph below Whereby, the slope cahnge gives an indication of the price elasticity.

(Bade and Parkin, 2001, p. 109)
Fig. (Bade and Parkin, 2001, p. 109)

In deciding the type or nature of demand the results of the computation are checked and used to make the decision. In the case the results of the computation is a figure greater than one, then the demand is price elastic meaning that it responds largely to changes in price. This can be further explicated by concluding that the percentage change in demand of an elastic situation is higher than the percentage change of price of the same commodity thus referred to as price elastic as shown in the graph below.

(Schenk, 2009, p. 1)
Fig. (Schenk, 2009, p. 1)

In a situation where the resulting figure computed equals to one, then the demand is therefore defined as unit elastic or rather unitary elasticity whereby a price change will have no effect on the demand. This situation mostly happens in monopolistic markets whereby the commodity has no substitutes.

(Schenk, 2009, p. 1)
Fig. (Schenk, 2009, p. 1)

Additionally in the situation where the figure computed is less than one to mean that a change in price has a lesser effect on the demand thus inelastic demand. In this case, the demand of the commodity is less responsive to the price changes to mean that a change in price will lead to a small or minute change in the quantity demanded of that commodity as depicted from the graph below.

(Schenk, 2009, p. 1)
Fig. (Schenk, 2009, p. 1)

A situation of relatively elastic occurs where the computed figure of price elasticity of demand is greater than one but less than infinity. On the other hand, relatively inelastic situation will occur in the instance that the computed figure for price elasticity is greater than zero but less than one. This is explained in the graph below;

(Schenk, 2009, p. 1)
Fig. (Schenk, 2009, p. 1)

Conclusion

From the above discussion, it can be clearly depicted that knowing the price elasticity of demand of a commodity one is using is very important. This is because it helps one interpret and predict the possible changes in price and demand and take precaution to partake them (Hardwick, 2002, p. 214). As for the case of the painter, the fact that an increase in demand leads to a drop in the quantity demanded is an indication that the price elasticity of demand of the paint is elastic as shown from the computation done above. This makes the painter know the type of good he or she is dealing with such that they already know that the commodity is greatly affected by price changes (Samuelson and Marks, 2003, p. 280). In addition to this it can be deduced from the factors affecting price elasticity of demand that paint is not a necessity thus its demand will have a great deviation in the case price changes.

References

Bade, R. and Parkin, M. (2001). Foundations of Microeconomics. Addison Wesley Paperback 1st Edition.

Hardwick, P. (2002). Introduction to modern economics, prentice hall publishers, New York

Riley. G. (2006). Price Elasticity of Demand. Web.

Samuelson, W. & Marks, S. (2003). Managerial Economics. 4th ed. Wiley

Schenk, R. (2009). Price Elasticity. Web.

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