Answer to Question #109111 in Microeconomics for lindi

Question

Critically discuss elastic, inelastic and unitary conditions/forms of price elasticity of demand through the use of practical examples and graphs...it's 45 mark

Answer 1

Economists calculate price elasticity of demand.

The price elasticity of demand for a good or service, Kd, is the percentage change in quantity demanded of a particular good or service divided by the percentage change in the price of that good or service, all other things unchanged.

The point price elasticity of demand is calculated as

We can distinguish three variants of the price elasticity:

1)     Inelastic demand (K_d<1) , if purchased quantity of goods increases by less than 1 % for every 1% of its price reduction. Usually the demand for necessity goods is inelastic (for example, salt)

2)     Elastic demand (K_d>1), if purchased quantity of goods increases by more than 1 % for every 1% of its price reduction. Usually the demand for goods that have substitutes is elastic (for example, different fruit)

3)   Unit elastic demand (K_d=1), if change in price will cause an equal proportional change in quantity demanded by the same percentage.