Cost Elasticity of Demand

 Price Firmness of Require Essay

Project 2

Cost Elasticity Of Demand

Price Elasticity of Demand is the quantitative measure of consumer behavior whereby there exists indication of response of quantity demanded for a services or products to change in price of the great or support ( Mankiw, 2007). The purchase price Elasticity of Demand can be calculated applying either the actual method or the midpoint method.

The Point Technique

Price Elasticity of Demand=Percentage change of Quantity Required

Percentage change of Cost

The Midpoint Method

Selling price Elasticity of Demand=(Q2 ' Q1) \ [ (Q2 + Q1)/2]

(P2 ' P1) \ [ (P2 + P1)/2]


Q1= initial Variety Demanded

Q2 = new Quantity Required

P1=Initial Selling price

P2= new Price

(Source: Mankiw 2007)

A good or service can be stretchy, inelastic or perhaps unit flexible. When the cost elasticity of demand of the commodity can be elastic this is when the quantity demanded of a good or assistance responds significantly to the boost or decline in price. For that reason after calculations the answer is greater than one so that it is elastic which means increase in price decreases volume demanded which often causes a decrease in total revenue as the decrease in variety demanded will be proportionally larger than the increase in cost. (Mankiw, 2007).

The good or perhaps service provides either comparatively elastic demand ( picture (d) ) or flawlessly elastic require ( picture (a) ). The difference of the two is that perfectly flexible has a Price Elasticity of Demand of infinity which means that a tiny change in price would lead to an infinitively large increase in demand which is shown in the diagram below (, n. d). While on the other hand Family member Elastic Require is when the Price Firmness of Require is more than one which shown in the diagram (d).

Perfectly Elastic Demand

(a)[pic]( Source:,n. d)

Perfectly Inelastic Demand


Source:, d. d) (b)

Inelastic Demand, Elastic Demand and Device Elastic Require

Source: ( Welker's Wikinomics Page -, n. d)



When a great or support is said to be inelastic after computation it is lower than 1 . This is certainly whereby an increase in price causes an increase in total revenue as the price maximize is proportionally larger than the decrease in amount demanded (Hakes 2007). There is certainly relative inelasticity of require ( diagram (c) ) and perfectly inelasticity of demand were a good can be demanded regardless of its price and the demand curve is usually vertical plan (b).

If a good has to be Unit Supple (diagram (e) ) after calculation the end result 0. This kind of whereby change in price does not have any impact on total revenue for the reason that increase in price are proportionally comparable to decrease in volume demanded (Hakes, 2007).

Value Elasticity of any nicotine products

The demand to get an addicting good like cigarettes will probably be relatively inelastic while the with regard to specific brands of cigarettes may very well be relatively elastic. Governments generally impose ‘Sin Tax” in goods just like cigarettes which means buyers have to pay bigger prices. Therefore leads to a decrease in product sales but the cost elasticity remains to be inelastic mainly because cigarettes contain an habit forming substance therefore consumers helps keep on getting to suit their cravings.

In Taiwan the federal government imposed income taxes on cigs in 2002 in order to decrease consumption and also to reduce the health problems caused by smokes which were placing strain on the government's overall health system (Lee, Hwang, En and Chen, 2004). This kind of led to reduced overall intake and improved tax income but the price elasticity continued to be inelastic in 0. 5274 and even after quotations for 2003 were made after further...

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