The concept of price elasticity of demand is important for formulating government policies, especially the taxation policy. Government can impose higher taxes on goods with inelastic demand, whereas, low rates of taxes are imposed on commodities with elastic demand.
What is elasticity and why is it important?
Elasticity is an important economic measure, particularly for the sellers of goods or services, because it indicates how much of a good or service buyers consume when the price changes. When a product is elastic, a change in price quickly results in a change in the quantity demanded.
What are the determinants of income elasticity of demand?
The four factors that affect price elasticity of demand are (1) availability of substitutes, (2) if the good is a luxury or a necessity, (3) the proportion of income spent on the good, and (4) how much time has elapsed since the time the price changed.
What is the income elasticity of a necessity?
A necessity has an income elasticity of demand which is positive but less than unity: as income rises, spending on a necessity rises, but the proportion of income spent on it falls. An inferior good has a negative income elasticity of demand: as income rises, spending on inferior goods falls.
Why is ped important?
Knowing PED helps the firm decide whether to raise or lower price, or whether to price discriminate. Price discrimination is a policy of charging consumers different prices for the same product. If demand is elastic, revenue is gained by reducing price, but if demand is inelastic, revenue is gained by raising price.
What is income elasticity of demand how it can be measured?
The income elasticity of demand (ey) can be measured by the following formula: ey = Percentage change in quantity demanded/Percentage change in income. Percentage change in quantity demanded = New quantity demanded (∆Q)/Original quantity demanded (Q) Percentage change in income = New income (∆Y)/original income (Y)
What are the factors affecting demand?
Factors Affecting Demand
- Price of the Product.
- The Consumer’s Income.
- The Price of Related Goods.
- The Tastes and Preferences of Consumers.
- The Consumer’s Expectations.
- The Number of Consumers in the Market.
What are necessity items?
Necessity goods are product(s) and services that consumers will buy regardlesss of the changes in their income levels, therefore making these products less sensitive to income change. This makes the income elasticity of demand for food between zero and one. Some necessity goods are produced by a public utility.
Why is Ped not useful?
The concept of PED may not be useful to the government for discouraging the use of private cars. To discourage the use of private cars, the government can impose a quota at a level lower than the current quantity which will lead to a fall in the supply.
What are the factors affecting PED?
Several other factors affect the Price Elasticity of Demand (PED)….Availability of substitutes, type or nature of a product, income, price, and time are the five known factors that affect the PED.
- Nature or type of Good.
- Availability of Substitutes.
- Price Level.
- Income Levels.
- Time Period.
What is income elasticity of demand and its types?
There are five types of income elasticity of demand: High: A rise in income comes with bigger increases in the quantity demanded. Unitary: The rise in income is proportionate to the increase in the quantity demanded. Low: A jump in income is less than proportionate to the increase in the quantity demanded.
What is income elasticity of demand with diagram?
“Income elasticity of demand means the ratio of the percentage change in the quantity demanded to the percentage in income”-Watson. For example, the demand for a product increases with increase in consumer s income and vice versa, while keeping other factors of demand at constant.
What is income elasticity of demand and its degrees?
Income Elasticity of Demand: Definition, Degrees and Measurement of Income Elasticity! It shows the responsiveness of a consumer’s purchase of a particular commodity to a change in his income. Income elasticity of demand means the ratio of percentage change in the quantity demanded to the percentage change in income.
