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Price Elasticity of Demand

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Question :

Choose a product/good/commodity/brand you are familiar with: One your company sells or one you personally consume. Consider the possible determinants of your chosen good’s price elasticity of demand. Write a 1- to 2-page business brief that includes the following sections. Include 1 to 2 sources.

Opening: Discussion of the chosen product/good/commodity/brand and the reasons you chose it.

Discussion on what you consider the major determinants of the chosen good’s price elasticity of demand.

Recommendation: Choose its one or two most significant determinants and comment on the good’s relative price elasticity of demand.

Answer : CONCEPT

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Price elasticity of demand is a significant microeconomic tool that helps in evaluating the relation of a good to its price. To define, it measures the degree of responsive of the change in demand of a particular product or a service with respect to a change in its price at a particular point of time. (Patrick L. Anderson, 1997) Thus, price plays a major role in determining the degree of elasticity to understand briefly, there are other factors that affect the price elasticity of demand:-

1. Availability of close substitutes: - close substitutes are those replacement options which can be resorted to when some factors play an adverse role to them. These substitutes can affect the elasticity of demand of a particular product either in a positive or negative fashion. When the availability of substitutes is more, consumers tend to close those with lower price lines. Hence, with higher availability degree of elasticity increases and vice versa. (R, 2017)

2. Significance of products own cost: - the cost estimates and actual costs incurred pose a significant impact on the elasticity of demand a particular commodity. When the costs incurred of an expensive product or service changes, its effects the buying price to the consumers in direct proportion and vice versa. Thus the price elasticity of demand is high when costs of expensive products like car change and the elasticity is low when the product is inexpensive such as a pen.

3. Time: - time factor is an important reason behind the price elasticity of demand for a particular product. When the product is a necessity or urgently required, i.e, when its consumption cannot be delayed the price elasticity is low because whatever the situation be consumer will not refrain to buy such goods. On the contrary when consumers have enough time to adjust their demand how so ever, these products have high elasticity of demand.

The product that has been chosen is salt. Salt like any other commodity has its own set of factor that regulates its demand and its elasticity. As stated above, let us consider each determinant in detail with respect to salt.

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1. Salt has no close substitutes. In fact there is no replacement to salt at all. Thus, consumers shall buy this commodity at any price any time and every time. This shall have no effect on the demand of the good. Consumers have no choice rather than buy this product for consumption and personal needs. Hence, salt is considered to have a low elasticity as 0.

2. Time consideration plays no role when the relevant good is a necessity and not a luxury item. Salt is an item of necessary requirement that cannot be delayed for use. When the stock is finished, a consumer shall buy it immediately without any further wait. Hence, time factor also induces how a consumer should respond to its demand

3. A product like salt is very inexpensive. Hence, its product cost doesn’t impact the elasticity of its demand. It shall have low elasticity of demand.

4. Consumers’ income is another determinant affecting the elasticity of demand. Since. Buying salt shall form only a small fraction of any consumer’s budget. Again salt is considered to possess low level of elasticity.

Hence, salt is considered to have relatively low elasticity of demand.

Price elasticity thus can result five results

1. Infinity- where there is change in demand and no change in its price.

2. More than 1 – where change in demand is more than change in price.

3. 1 –where change in demand is more than change in price.

4. Less than 1 – where change in demand is less than change in price

5. Zero – where there is no change in demand irrespective of the change in price.

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