Roxanne Rivera
Dr. Kevin Peek
Econ. 2302. VF1
03/26/2019
First Essay: Price Elasticity of Demand
Price Elasticity of Demand is an economic measure of difference in the quantity demand
amount of a commodity purchased in correspondence to the change of its own price. Price
Elasticity of Demand basically measures how buyers demand answers or results to a change in
the price of a product, or to its services. Let’s just say, if the price elasticity of demand is a large
quantity, the consumers demand will change when the prices changes. The consumer demand
will not change or might have a slight difference if the price elasticity of demand is a poor
quantity.
If expressed mathematically, if seen below, would be as follows:
Pd = Δ quantity ÷ Δ price (q + q’)/2 (p + p’)/2
Pd = Price elasticity of demand.
Δ quantity = The amount of the change in quantity demanded caused by the price change.
q = The original quantity demanded before the price change.
q’ = The new quantity demanded after the price change.
Δ price = The amount of the change in price.
p = The original price.
p’= The new price.
A donut shop sells cream cheese donuts for $1.00 each and have a quantity demand of 50
donuts per day but then they decide to increase their sells, by raising the price of their donuts to
$2.00 and maximizing the quantity of demanded to 80 cream cheese donuts per day. Below you
will find the solved problem for price elasticity in demand.
Percentage change in quantity supplied:
(80 − 50) ÷ {(80 + 50) ÷ 2} =23%
Percentage change in price:
($2 − $1) ÷ {($2 + $1) ÷ 1} =33%
Price elasticity of supply:
23% ÷ 33% =70%
Perfectly elastic demand will result when a price increases, aside from how small
or large of the quantity and causes consumers to completely stop purchasing that good or
service. An example of perfectly elastic demand would be if an apple company from the state of
Washington decides to change the prices of it apples from $1.63 ea. Lb to $1.87 ea. Lb. due to a
change in productivity within the company. The demand is perfectly elastic for apple in
Washington. There are a variety of companies in the state of Washington that produce apples and
compete for much the lower prices. In this case, the consumer can easily purchase their apples
from any other apple company at a lower price, which would make the demand of this product
perfectly elastic.
Perfectly inelastic demand is the exact opposite. This happens when customers do not
react to a price change, regardless of how high it might be. Perfectly inelastic demand normally
occurs with products or services that customers must have or are a necessity. Two good
examples for inelastic demand would have to be gasoline and water. Gas is a product that drivers
need a precise quantity each week to drive their vehicle even though gas prices are known to
change on a daily basis. Water also falls within this same category because it is a product that is
essential in someone’s day to day basis regardless of the price of the product.
There are four major factors that influence the price elasticity of demand on goods and
services; which are:
 Availability of substitutes
 Percentages of a consumer’s budget spent on the product/service
 Length of time available to adjust to a price change
 Whether the goods/service is a necessity or luxury
Availability of substitutes is one of the main factors that take part in impacting the price
of elasticity demand. This component has to do with goods that a person could intake rather than
a specified good. For example, most food products typically have several different choices to
choose from in the matter of brands. The price elasticity of demand for these food products, for
instance, should be pretty high because people usually have different options for them. Suppose
Kraft slice cheese decided to raise their prices, the consumer could easily choose the more
affordable choice being, Hill Country sliced cheese. However, if an item is to be more limited in
substitute options than other products, that would be considered particularly inelastic.
The percentage of a consumer’s budget spent on the product/service usually occurs when
a person spends more on a particular good or service, the greater will be their reaction will be
when the prices change. It also has an impact on the price of elasticity demand as a consumer is
more than likely to adjust their budgets for a product or service that is considered necessary in
contrast to a product or service that isn’t as necessary. For example, if you were to typically
purchase a cheese burger from McDonalds, which is $1 plus tax but an increase of 50% were to
happen to the product, the difference would only be 50 cents. But what if a television usually
costs $1,000 were to have a 50% increase. The television would have an increase of $500. The
consumer would then look elsewhere for a more convenient price. The reaction to this change of
price would be considered high elasticity.
The length of time available to adjust to a price change is the more time a person has
available to adjust to a price change, the greater the price elasticity of demand will be. This is an
important factor because consumer demand is more probable to be higher if the commodity is
only accessible for a limited period of time. Therefore, some particular products may result in a
climb or drop in costs depending on the demand. A really good example of this factor would be
gasoline prices rising, after a natural disaster is to occur. This phenomenon would limit the
shipment of gasoline to certain areas, increasing gasoline prices. This occurrence then challenges
the consumer to either comply with the increase of prices or limit the use of the gasoline based
product. The short term response to the price change would be inelastic, but in the long term
response would ultimately considered elastic due to eventually getting accustomed to the price
change.
Whether the good/service is a necessity or luxury is when the price elasticity of demand
for goods and services that are considered to be necessities will be much more inelastic than
goods and services rather than of luxuries. Let’s say if the price of life-saving surgery increases
by 50%, patients will resume requesting it because this necessity is crucial to them. This makes
the price elasticity of demand for necessities inelastic. But if the prices of luxury goods such as
vacation cruise ships were to increase, consumers would react by vacationing less on cruise
ships. The price elasticity of demand for luxury goods is elastic.
The following examples of goods and services have a different demanding response as
elastic, inelastic, or unitary elastic, and here is why:
a) Athletic shoes: This is elastic because they more of a luxury than a necessity.
b) Medicine for Diabetes: This would be inelastic because even if the prices were to rise or
drop, the consumer in need of this product will continue to purchase their prescribed
medication.
c) Fast food: This is elastic for the fact that there are a variety of other fast food substitutes
rather than one initial restaurant.
d) College education at Harvard: This is elastic because Harvard can be considered a luxury,
and there are numerous of other colleges available to people in search of higher
education.
e) Pens: They are elastic because pens are produced by so many companies, some being
more or less affordable than others.
f) Houses in McAllen: It is elastic because the prices of homes vary especially in a highly
populated location like McAllen
Works Cited
Econ. 2302. VF1 - Professor's Lectures Notes
McEachern - Micro Econ 5 Principles of Microeconomics (chapter 5- info. related to topic)
https://www.myaccountingcourse.com/accounting-dictionary/perfectly-elastic-demand