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Price elasticity of demand watch

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1. So we got set a 10 marker but not too sure what I have written is correct.

"Explain with examples why different goods and services have different price elasticity of demands" (10 marks)

Price elasticity of demand is the responsiveness of the quantity demand to a change in the price of the product. It is calculated by doing the percentage change in the quantity demanded divided by the percentage change in price. PED is always negative due to the law of demand. However if the value is between 0-1 it is price inelastic and if it is greater than 1 it is said to be price elastic. Price inelastic is where the percentage change in the quantity demanded is insensitive to a change in price. An example of this would be tap water or petrol prices as these are a necessity. On the other hand price elastic is where the percentage change in the quantity demanded is sensitive to a change in price. Example of price elastic goods are any form of entertainment such as televisions.

The reason many goods have difference price elasticity of demands is because of the following determinants. An elastic good is said to have a greater availability of substitutes meaning that there are many alternatives. A common example would be a specific brand of baked beans a rise in the price of one brand would result in more consumers buying an alternative brand. The second factor is the percentage of income it takes up, a banana for example takes up a very small proportion of an individual’s income therefore a rise in price will not cause the percentage change in the quantity demanded not to change by that much. So the higher the percentage income a good takes up the more elastic it is. In addition if the product is a well known brand for example Levi’s jeans it is said to be an elastic good. The reason for this is because Levi’s jeans are known for their luxury and thus not a necessity so the rise in price will cause a greater percentage change in the quantity demanded. The price elasticity of demand is also dependent on how widely defined it is. The more widely defined a product is the more elastic this is. For example black trousers with stripes are more defined than plain trousers so there are fewer substitutes. The final determinant is time the longer the time period the more elastic a good becomes.

Overall, price elasticity of demand depends on the factors mentioned previously.

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Updated: January 17, 2015
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