Price Elasticiy

Price elasticity of demand.

http://www.bdlive.co.za/business/retail/2013/07/10/business-day-tv-petrol-price-increase-and-the-effect-on-consumers

The link above tells us about the price of petrol increase. This article illustrated the economic concept of price elasticity of demand.
What is price elasticity of demand?
Price elasticity of demand is a kind of measure of the relationship between a change in the quantity demanded of goods and services and a change in its price. There are three types of elasticity: elastic, unit elastic and inelastic. There are some formulas to calculate the price elasticity of demand(Ed). Such as:

Point Method:
Ed=   percentage change in Quantity Demanded
               Percentage change in Price


Midpoint Method:
Ed=    Change in Quantity    ÷   Change in Price
          Sum of Quantities/2       Sum of Prices/2




When Ed is greater than 1, then the particular goods or services are elastic. When the Ed is equal to 1, then the particular goods or services are unit elastic. And when the Ed is lesser than 1, then the particular goods or services are inelastic.


Graph for Elastic Demand:


When elastic demand, the total revenue of seller will affected by a change in price due to the quantity demanded. For an example: when the price is at $2, the total revenue is $60 and when the price is increase to $3, the total revenue decreases to $30. This is because when the prices slightly increase, the consumers can just switch to the other substitutes.


Graph for unit elastic demand:

When unit elastic demand, the total revenue of seller will not affected by a change in price due to the quantity demanded.


Graph for inelastic:

When inelastic demand, the total revenue of seller is insensitive due to the price change.

• From the link on top, the article is related to inelastic demand. Petrol is a necessity for everyone on earth who has a vehicle. So when the price of petrol increased, the quantity demand for petrol will not decrease much because everyone needs petrol to pump in their vehicles. Without petrol, all the vehicles are just a piece of steel. Hence all the people will choose to tighten up their wallet and pay the expensive petrol fees.

Written by Kenneth Lee Ron 0314884