Demand elasticity measures the amount of affect a price change will have on demand. When a price change does not affect the level of demand by much it is then said to be inelastic. To apply this concept let us use an example. If you need water to drink to survive you are going to pay whatever price increase to survive. In this scenario demand is said to be inelastic. There are goods and services however that do not fit in this example and are categorized separately. If the price of certain type of soft drink were to quadruple to $4.00 per 12 oz. can then demand would be greatly affected by this price change. Here we have an example of elastic demand because consumers do not need to buy that specific type of soda and it is not essential to their everyday livelihoods. To put it plainly, inelastic demand means that consumers will still buy a product even when the price increases; whereas elastic demand means that consumers will not buy that product when the price increases. Economists measure this with a formula.
Thursday, February 7, 2013
Demand Elasticity
Since demand is affected by a multitude of factors why is it that the change in price does not always relate to the same amount of change in demand? Goods and services are not always valued, in terms of their importance or necessity, the same to the consumer. Or in other words, think about the categorization of your needs and your wants. For example, if the price of a need changes you are still willing to pay for that good or service because it is essential to your survival. On the other hand, if a price changes in relation to a simple want, then your level of willingness to pay for that good or service becomes less. The demand for goods and services do not always respond the same way to price fluctuations.
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