EGT1 Task 2

Price elasticity that relates to demand is determined by many factors. Price elasticity is measured by the change in price and the response from consumer demand. The demand of a good or service will vary the price in the item. The most important factor to determine the price elasticity of demand is necessity. If a good is a necessity, the demand will seldom change and the price is able to be adjusted. The demand is the most important due to the freedom it provides for price adjustment and inventory control. With necessity comes an inelastic price. Other factors such as the

at total revenue and price elasticity of demand are closely related. (McConnell, Brue, Flynn, 2012)

Price elasticity of demand refers to the difference in demand as related to price. According to Douglas (2012), “Price elasticity of demand is defined as the percentage change in quantity demanded divided by

b. EXPLAIN how the total revenue test can be used to determine if a demand curve is elastic or inelastic. Use two graphs with numerical examples in your response. ( ____/5)

2. Total revenue falls as the price of a good is raised, if the demand for the good is ( )

Price elasticity of demand is a Theory of the relationship between a change in the quantity demanded of a

Elasticity is a measure of the responsiveness of demand to changes in the price of a good or service. In the case of Steam Scot, when the price rises from 4 to 5, demand falls from 60,000 to 40,000 units. The original equilibrium market price of 4 pounds resulted in demand of 60,000 units and this generated revenue of 240,000 pounds. When the prices increased to 5 pounds the resulting demand is 40,000 units, and this generates total revenue of 200,000 pounds. When market price changes from 4 pounds to 5 pounds 40,000 pounds of revenue are lost in this indicates an elastic price elasticity of demand.

When the elasticity of demand is elastic, the change in quantity will be greater that the change in price. Hence, the total revenue will reduce with increasing prices and increase as prices decrease. However, if the business offers goods or services with inelastic price elasticity of demand, then the change in quantity demanded will be smaller than the change in price. Consequently, the total revenue, which is a product of the two will increase when

Therefore, when price elasticity of demand for a product is elastic, the quantity demanded changes sharply in response to small changes in the price of the product as illustrated in Figure 1(b). However, when price elasticity of demand for a product is inelastic or perfectly inelastic, the quantity demanded will only changes modestly or none at all when the price level of the product changes substantial as illustrated in Figure 1(c) and 1(a).

There are three kinds of elasticity. There is elastic demand, where the elasticity is over 1. There is unitary elastic, where it is at 1.0. There is inelastic demand, where the elasticity is under 1 (Investopedia, 2013).

Elasticity of demand is measured as the percentage change in quantity demand divided by the percentage change in price .

Elasticity: When a consumer is in greater need of resources, there is a smaller chance for price change. However, when goods and services are in less demand as a necessity, price change will not affect the economy as much. Elasticity is based on the change of supply and demand of goods and services that a society is in need of. (Investopedia)

Unit Elastic Demand The unit elastic demand is a demand relationship in which the percentage change in quantity demanded is the same as the percentage in change of the price.

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Price elasticity of demand (PED) is able to show the relationship between the price and the quantity demanded http://www.economist.com/economics-a-to-z/p#node-21529502 this therefore allows calculations to be shown for the effect of any changes of prices of the demanded quantity, and this is