How are we affected by price elasticity of demand Research Paper

How are we affected by price elasticity of demand - Research Paper Example The Law explains that keeping all other factors affecting demand constant, the quantity demanded for a product or a service at a particular point of time is inversely proportional to its price. Thus, price and quantity demanded has an inverse relation with each other. The higher is the price level, lower will be the consumer willingness to buy a product or a service. As a result, the demand curve is always negatively sloped according to the law of demand. (Source: Author’s Creation) The above figure reflects the demand curve where Q stands for quantity demanded for a product or a service and P is the price level. There are also other factors that affect quantity demanded. This essay will briefly explain the different determinants of demand, assuming the impact of one variable on demand is analysed provided all the other factors are given. The income of consumers is positively related to the quantity demanded for goods and services. The higher is the income of the consumers the greater is their level of purchasing power thus consumers will always demand more with the rise in income levels. The quantity demanded also depends on the tastes and preferences of the buyers. When analysed in details the quantity demanded for a product or service is largely dependent on the complementary and substitution effect. For instance, the quantity demanded for Pepsi will always be increasing with the rise in the price level of Coke. Again the demand for cars will drastically fall with the rise in fuel price. There are other products like Bajra also known as inferior goods, whose quantity demanded falls with rise in income of the consumers. The nature of goods concerned is also an important parameter to analyse the quantity demanded for a good or a service. The goods reflecting status symbol always show a positive price effect in the quantity demanded. For example, the demand for a house sold in auction. Necessities are other types of goods that are insensitive to the chan ges in price, like the demand for life saving drugs. Price Elasticity of Demand Elasticity of demand is a quantitative measure that shows the degree of responsiveness of quantity demanded for a product or a service with respect to the changes in the various determinants of demand (IOWA State University, 2007). Price elasticity of demand shows the degree of responsiveness of quantity demanded for a commodity or a service with respect to chances only in its price level keeping all other factors affecting demand constant (Andrews & Benzing, 2010). The basic method of calculation of price elasticity of demand (Ep) is:- Ep = dQ/Q dP/P P and Q stands for price and quantity while dQ and dP shows the change in quantity demanded and price respectively (Litman, 2004). In order to make the analysis easy, economists take the mod values for calculating price elasticity of demand. The table below shows the five basic variations in price elasticities of demand. Value Types of elasticity’s E p = ? Perfectly Elastic Ep = 0 Perfectly Inelastic Ep = 1 Unitary Elastic Ep > 1 Relatively Elastic Ep < 1 Relatively Inelastic (Source: Traczynski, 2007) The above five variations in elasticity are all measured in terms of their mod values. Impact of Price Elasticity of Demand The quantity demanded by the consumers technically depends on the different values of price elastici