ECO204 Week 2 Discussion 1 The Price Elasticity of Demand

Hello class,

Identify the determinants of the price elasticity of demand. Explain each one.

               Goods or services are considered elastic if the coefficient of quantity demand is higher than the price change by one; goods or services are inelastic if the coefficient is less than one when price demand is lower than the change in price (Amacher & Pate, 2019, Ch. 4.2).   Being inelastic basically means that the differential between price change and quantity demand is so marginal that there is not a huge difference when one changes, ergo, inelastic.  When the coefficient is greater than one, there can be larger differences when price or quantity demand shift, the higher the number, the larger the possible shift, making that item very elastic.  There are a few determinants when trying to calculate for price elasticity of demand: substitutability, time, size of a purchase, and if it is a luxury or necessity (Amacher & Pate, 2019, Ch. 4.4).  Substitutability considers whether there is another comparable option (Coke versus Pepsi), time considers how much time people have to think over the factors of buying the product or service, the size refers to price of the product and the impact on the persons income, and to go with income, people will determine buying if it is a necessity or a luxury, meaning if people need a certain item to live, they will buy it, if not it is most likely a luxury; that affects the product in number of sales and possibly needing to lower the price if the demand is low.

Determine whether each of the following items is elastic or inelastic: bottled water, gourmet coffee, Apple cell phones, and gasoline. Explain your reasoning.

          Our text told us services and goods are almost always considered elastic, additionally, all of these products fit the criteria to be elastic.  Each one of these items have other competitors with comparable products (suitability), people have time to evaluate these products, other than the cell phone, the items are relatively affordable (cell phones have monthly payment installments), and these are all essentially a necessity to survive in our country.

How are the price elasticity of demand and total revenue related? Why is the price elasticity of demand important to pricing?

          Demand curves show price and demand relationships, if you take the number of sold items and multiply that by the price, you get the total revenue generated.  Businesses use price elasticity of demand and total revenue to determine prices of their products.  Price elasticity is important to demand because it shows the relation to total revenue which determines what price to sell a product.  If you raise the price of a product too much, the total units sold will go down (quantity demand lowers) resulting in less total revenue (inelastic with a coefficient less than one).  However, if you raise a products price higher, you could make more total revenue compared to the lower loss from a decreased quantity demand (elastic, coefficient greater than one).  So price elasticity is very important because it basically tells you where to set the price (Amacher & Pate, 2019. Ch. 4.4).

Resources:

Amacher, R., & Pate, J. (2013). Microeconomics Principles and Policies. San Diego, California: Bridgepoint Education, Inc.