July 14, 2012

SYNTHESIS PAPER OF DEMAND ELASTICITY

Synthesis Paper of Demand Elasticity

By John Michael G. Favila INTRODUCTION Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality Peter F. Drucker quotes (American Educator and Writer,b.1909) The above quote depicts the phenomena of price elasticity of demand in our lives. At first thought price elasticity of demand appears to be an economic terminology that is generally accepted in business economy, but has little to do with our daily lives, however, by participating in an exercise regarding our purchasing habits, we were able to determine that there are determinants that influence how we buy, what we buy and what we consider essential in our lives.

DISCUSSION PROPER Literally, elasticity means flexibility. In economics, elasticity is measure of responsiveness of dependent variable to the change in independent variable. It is expressed as the ratio if the percentage changes in dependent variable to the percentage change in independent variable. Elasticity if demand can be defined as the degree of responsiveness of the demand (dependent variable) to changes in factors affecting demand (independent variable). In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. Demand elasticity is important because it helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors. A firm grasp of demand elasticity helps to guide firms toward more optimal competitive behavior.

JOHN MICHAEL G. FAVILA

MANAGERIAL ECONOMICS

July 14, 2012

SYNTHESIS PAPER OF DEMAND ELASTICITY

Demand elasticity is a measure of how much the quantity demanded will change if another factor changes. One example is the price elasticity of demand; this measures how the quantity demanded changes with price. This is important for setting prices so as to maximize profit. When price elasticity of demand is elastic, the firm should lower prices, since it will result in a big uptick in demand, increasing your total revenue. When price elasticity of demand is inelastic, you should increase prices because there will be only a small decrease in demand, and again, total revenue will increase. When price elasticity of demand is unit elastic, changing the price will not change total revenue, since price and quantity will generally change in lock step with each other. Consumer responsiveness to price change varies. Responsiveness may also vary at different price ranges. Price elasticity of demand measures consumer response to price changes. If consumers respond well to price changes, then demand is said to be elastic. On the other hand, if consumers do not respond well to price changes, then demand is said to be inelastic. The degree of elasticity or inelasticity of demand is measured by the price elasticity coefficient. Percentage changes in price and quantity is determined by the use of the average of prices and the average of quantities being considered in relation to price elasticity of demand. On a graph, perfectly inelastic demand is a vertical line parallel to the vertical axis line, whereas perfectly elastic demand is a horizontal line above and parallel to the horizontal axis line. At various price ranges on a demand curve, demand elasticity varies. It tends to be elastic in the upper left segment of a graph while it tends to be inelastic in the lower right segment. Demand elasticity changes according to total revenue and price because revenue and price are in relationship to each other. If total revenue and prices change in opposite directions from each other (one rises while one declines), then demand is elastic, or responsive to price changes. If total revenue and prices change in the same direction (both rise or both decline), then demand is inelastic. On the other hand, price change

JOHN MICHAEL G. FAVILA

MANAGERIAL ECONOMICS

July 14, 2012

SYNTHESIS PAPER OF DEMAND ELASTICITY

will correspond to an unchanged total revenue when demand is of unit elasticity, which is defined as occurring when the percentage change in the quantity demanded is equal to the change in price. Demand elasticity is determined (1) by the number of available substitutes, (2) by price relative to budget, and (3) by whether the product is a deemed a necessity or a luxury.

CONCLUSION

Demand Elasticity the degree to which changes in price effect changes in demand. Demand is elastic when a small change in price effects a large change in demand. Such products that show great variability in demand are known to have elastic demand. Demand is inelastic when a change in price does not bring about a correspondingly large change in demand, or any change at all. Said products are known to show inelastic demand.

REFERENCES

Arnold, Roger A. (17 December 2008). Economics. Cengage Learning. . Ayers; Collinge (2003). Microeconomics. Pearson. Taylor, John B. (1 February 2006). Economics. Cengage Learning.. Retrieved 5 March 2010. Vogel, Harold (2001). Entertainment Industry Economics (5th ed.). Cambridge University Press Wall, Stuart; Griffiths, Alan (2008). Economics for Business and Management. Financial Times Prentice Hall. Retrieved 6 March 2010. Wessels, Walter J. (1 September 2000). Economics. Barron's Educational Series.

JOHN MICHAEL G. FAVILA

MANAGERIAL ECONOMICS