ECO 605 Assignment 1.1: Price Elasticity of a Demand Curve
ECO 605 Assignment 1.1: Price Elasticity of a Demand Curve
The price elasticity of demand is defined as the ratio of the percentage of change for the quantity demanded a given product to the percentage change in pricing. Price elasticity is often applied to understand the transformation or change in the supply and demand with the changes in the product’s prices. In the calculation processes, in case the quantity of a product demanded changes more than the changes in pricing, the product or service is said to be elastic. For instance, the prices of commodities or services offered may increase by 5%; however, the demand may fall by 10% (Dinopoulos et al., 2020). On the other hand, if the changes in the quantity of products purchased are similar to the changes in prices, then the product or service is said to have unitary price elasticity. Finally, a product or service offered is said to be inelastic if the quantity purchased changes is less than the prices.
Price elasticity demand can be expressed in a graphical format. The price elasticity at the points within the straight demand curve is
always equal to the length of the curve expressed just below the points divided by the measurement of the length of the points that exist above these points (Piveteau & Smagghue, 2019). For the curved demand curve, the price elasticity can be determined by constructing a tangent to the curve within the point and then adhering to the approaches mentioned above. In price elasticity demand, elasticity is defined as the degree of responsiveness in demand or supply in response to changes in prices (de Rassenfosse, 2020).
When a curve is more elastic, the minor changes or alterations in prices will cause large variations in the quantities of the product or services consumed. In every graphical model, elasticity can always be represented by the appearance of the demand or supply curve (Hajy Alikhani, 2019). Usually, a more elastic curve is horizontal, while the less elastic curve often tilts
vertically. When analyzing elasticity, there is always the use of the term flat to refer to curves that are horizontal. Therefore, a more float elastic curve is always closer to becoming perfectly horizontal.
| Out of Pocket Price per Clinic Visit | Number of Clinic Visits |
| 60 | 100 |
| 50 | 200 |
| 40 | 300 |
| 30 | 400 |
| 20 | 500 |
| 10 | 600 |
| 0 | 700 |
Table 1 represents data for the demand schedule for visits to a clinic. There are two major variables with data that can be presented graphically. These variables include “Out of Pocket Price per Clinic Visit” and the “Number of Clinic Visits.”
Graph 1: Out of Pocket Price per Clinic Visit versus Number of Clinic Visit
Graph 1 shows the representation of the information given in table 1. The graph shows an increase in out-of-pocket price per clinic visits with the increase in the number of clinic visits. For instance, for a single clinic visit, the out-of-pocket price is 100, and for seven visits, the out- of-pocket visit is 700.
What Each Point on the Demand Curve Represents
From the graph, the perfect elastic curve will become horizontal at the extreme ends.
However, a perfectly inelastic curve will turn vertical. Perfectly elastic and perfectly inelastic curves can be used to determine what both curves should look like. The graph should become more vertical for inelastic curves while the elastic curve should be flatter, such as the horizontal line in the letter E. In general, elasticity can be determined by examining the relative flatness or steepness of the demand or supply curve (Otobideh et al., 2021). By examining the curves, it makes sense that the method/formula for computing elasticity is the same as the one used in calculating the gradient or the slope of the graph. From the graph, instead of relating quantities of goods and the actual prices, elasticity only determine the relationship between quantities of goods or services and the changes in prices (Lehner & Peer, 2019). The above relationship is represented by the coefficient of elasticity. The coefficient of elasticity is determined by dividing a percentage change in vertical measurement by the percentage change in horizontal measurement (Privitera et al., 2019). The formula from the graph is given by:
Elasticity = (percentage change in quantity)/ (percentage change in price)
Graph II shows what each point in the demand curve represents. For the out-of-pocket price per clinic visit of 50, the number of clinic visits is 200. The graph, therefore, shows an increase in the number of clinic visits with an increase in the out-of-pocket price per clinic visit.
% Change in Quantity
= {(0-60)/(0+60)/2}*100
= {-60/-30}*100
= 50%
% Change in Price = {(100-700)/(100+700)/2}*100
= {600/400}*100
= 150%
Price Elasticity of Demand = 50/150
= 0.33
The above calculation involves determining a change of the y-axis and then dividing by a change in the x-axis, expressing them as a percentage. To determine the price elasticity of demand, a percentage change in the y-axis is divided by the percentage change in the x-axis. From the calculation, the price elasticity demand is 0.33, which is smaller than 1. This indicates that the demand is inelastic in the interval specified. In most cases, the price elasticity of demand is always negative because quantity demanded and prices often move in opposite directions within the demand curve (Torriti, 2019). Therefore, elasticities are always expressed as positive numbers. Therefore, mathematically, the absolute numbers or values of the outcomes are always used. From the statement, the price elasticity of demand, E, states that for a one percent increase in the price of a given product, there is an expectation that the quantity demanded will decrease by E%.
Conclusion
The price elasticity of demand is defined as the ratio of the percentage of change for the quantity demanded a given product to the percentage change in pricing. Price elasticity demand can be expressed in a graphical format. The price elasticity at the points within the straight demand curve is always equal to the length of the curve expressed just below the points divided
by the measurement of the length of the points that exist above these points. From the calculation, the price elasticity demand is 0.33, which is smaller than 1. From the graph, the perfect elastic curve will become horizontal at the extreme ends. However, a perfectly inelastic curve will turn vertical. Perfectly elastic and perfectly inelastic curves can be used to determine what both curves should look like.
References
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Dinopoulos, E., Kalyvitis, S., & Katsimi, M. (2020). Variable export price elasticity, product quality, and credit constraints: Theory and evidence from Greek firms. Journal of International Money and Finance, 104, 102135. https://doi.org/10.1016/j.jimonfin.2020.102135
Hajy Alikhani, P., Sadeghi Moghadam, M. R., Razavi, S. M., & Mohaghar, A. (2019). Revenue management and seller pricing decisions in retail industry: An agent-based
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Lehner, S., & Peer, S. (2019). The price elasticity of parking: a meta-analysis. Transportation Research Part A: Policy and Practice, 121, 177-191. https://doi.org/10.1016/j.tra.2019.01.014
Otobideh, S. A., Moeeni, S., Mohammadzadeh, Y., Rahimi, B., Shabaninejad, H., & Yusefzadeh,
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Piveteau, P., & Smagghue, G. (2019). Estimating firm product quality using trade data. Journal of International Economics, 118, 217-232. https://doi.org/10.1016/j.jinteco.2019.02.005
Privitera, G. J., Gillespie, J. J., & Zuraikat, F. M. (2019). Impact of price elasticity on the healthfulness of food choices by gender. Health Education Journal, 78(4), 428-440. https://doi.org/10.1177/0017896918813009
Torriti, J. (2019). Elasticity. In Energy Fables (pp. 48-56). Routledge.