Question 2: The response of consumers to a change in price is measured by the price elasticity of demand. Therefore the demand for various goods may be characterized in three ways: elastic, inelastic, and unitary elastic. • 2.1 Discuss the characteristics of elasticity by means of graphs and give examples of each.

Answer:

Price elasticity of demand is the major term that uses in the market related to different products. In other words, when due to any change in price, change may appear in the demanded quantity of the product in responsiveness then the price elasticity of demand may appear. Depending on the rate of change in the demand according to price the demand may be elastic, inelastic or unit elastic. Due to price of the product the demand for the product effect with major or lower ratio according to product and its requirements. There are many factors that become the cause of change in price. When the supplier has to face many additional expenses then he covers its all expenses through the price of the product, and in this situation, supplier focus on increasing the price according to its settlement and product descriptions.

Price of the product also effect the demand of customers because customer prefers to buy that product when its price is low, and when its prices move at high level that moves beyond its range of purchase then they try to minimize the usage and disturb their demand related to that product. So it depends on the nature of the product and its requirement that due to smaller change any small change arise in the demand or vice versa and due to smaller change in price major change appear in the demand or due to major change in price major change appear in the demand of the product. Customers purchase the product according to their purchasing power, and they also want to complete their requirements and demand for specific products. So the demand for the product may change due to many factors, but the most important factor is price. (economicsdiscussion.net, 2019)

Graph of The response of consumers to a change in price is measured by the price elasticity of demand:

             According to the nature of price and demand the price elasticity of demand may convert into five different categories according to their working and utilization. Percentage change in quantity demanded divide the percentage change in price give the result of price elasticity of demand. Price and demand have an inverse relationship because their change sin ratio with two variables moves in opposite direction.

Figure  shows price elasticity of demand

There are 5 different types of price elasticity of demand which include:

Figure shows different types of price elasticity of Demand

·         Perfectly Inelastic Demand (EP=0)

Perfectly inelastic demand means that when any change appears in the price, no change occurs in the demand of the product. So, in this case, the demand remains constant, and its demand curve presents a straight line as given below;

Figure 7 shows perfectly inelastic demand and constant demand

Water or basic need food are consider the perfectly inelastic demand because for normal products it is very difficult to find the perfect inelastic demand. When the price is high the total revenue high, and when the price is low the total revenue is also low.

·     Relatively Inelastic Demand (EP<1)

Relatively inelastic demand means that a higher percentage change appears in the price of the product and less change appear in the percentage change of the demand. For the relatively inelastic demand the demand curve moves in sloping rapidly. Its effect on the revenue is that when the price is high the total revenue is high and when the price is low then the total revenue is also low.

Figure  shows relatively inelastic demand and its impact on revenue stream

·    Unitary Elastic Demand (Ep=1)

Unit elastic demand means that the same change occurs in the price of the product according to its demand. In other words, proportionate change appears in the demand and price of the product, and same percentage change appears in the price with the demand of the product. When the price increase or decrease, no change appear on the total revenue of the organization

Figure 9 shows Unitary Elastic Demand (UED) and constant revenue

·    Relatively Elastic Demand (Ep>1)

Relatively elastic demand means that less change appears in the price and major change occur in the demand of the product. The percentage change in the demand is bigger as compared to percentage change in the price. In relatively elastic demand, its curve moves at sloping direction. Its effect on the total revenue is that when the price is high, the revenue is low and when the price is low, revenue is high

Figure  shows relatively Elastic Demand and its impact on revenue fluctuation from low to high

·         Perfectly Elastic Demand (Ep=∞)

Perfectly elastic demand means that when any minor change occurs in price, the demand goes to infinite. Buyers pay small amount for the required product, and when major change appears in change the buyer can use alternative products because it also needs perfect competition. A horizontal straight line may appear in the demand curve, and no any effect appears on the revenue due to price changes.

Figure  shows Perfectly Elastic Demand (PED) with no effect on total revenue

Discussion of The response of consumers to a change in price is measured by the price elasticity of demand:

            According to given requirements, the graph explains that the price elasticity of demand is very helpful to determine the price of the product according to its demand and different type of elasticity also explains many factors. It depends on the market situation and its trends that how much demand id increase or decreases and the price fluctuate. Suppliers determine the product’s price elasticity of demand to manage the price of the product which affects the total revenue of the product. When the goods are multiplied with the price then business obtains its total revenue. Elasticity explains the change in total revenue.

There are also different factors that affect the price elasticity of demand, which includes habit, time, necessities and substitutes. Addictive or habitual product and its demand are inelastic because customer never changes their choice due to any change in price. With the passage of time, the consumers become more elastic, and they shift to some other alternative product that fulfills their requirements. So it affects the law of price elasticity of demand according to conditions. Necessities product’s demand is inelastic because people never shift to any other product if any change brings in the price of the product. Because normally consumer never tries to change their necessary items of daily routine. Substitutes also affect the price elasticity of demand in such a way that when people find many alternatives or substitutes than in case of any change in price, they easily shift to other products and the demand for product goes down due to minor changes in price.

The price elasticity of demand is very helpful in explaining business terms and conditions. It also gives an opportunity to the supplier to set the price by adjusting the tax of the product, and when the product is inelastic then consumer has to pay tax according to price of the product. It also helps the government to show the impact of policies of taxation with accurate predictions. Is the elasticities of the product may differ according to the income group then firm may charge different prices according to income groups. And tool price discrimination is going to use in this situation. With the projected change in price, the business can predict the change in total revenue. (intelligenteconomist.com, 2019)

Conclusion of The response of consumers to a change in price is measured by the price elasticity of demand:

            At the end of the discussion, we can conclude that price elasticity is very helpful in determining the price of the demand according to supply can demand of the product because the price affect the demand of the product in different ways to different effects appear in the demand of the product when any change occurs in the price of the product. Consumer have different habits or demand related to their required product, but they also manage their purchasing power according to their income, so they have to consider the price of product with their need, and then they select the product which gives them more and more benefits and also never becomes a burden on their pocket related to the income. So price elasticity of demand is very helpful to create a balanced environment according to price and its demand so people can avail many benefits which such situations and also obtain the product according to their demand and requirement.

Reference of The response of consumers to a change in price is measured by the price elasticity of demand:

Economicsdiscussion.net. (2019). 5 Types of Price Elasticity of Demand – Explained! Retrieved              from http://www.economicsdiscussion.net/elasticity-of-demand/5-types-of-price-           elasticity-of-demand-explained/3509

Intelligenteconomist.com. (2019). Price Elasticity of Demand. Retrieved from                                           https://www.intelligenteconomist.com/price-elasticity-of-demand/