The elasticity of demand is the responsiveness of demand to changes in the price of a commodity. Price elasticity of demand is the measure of the relationship between the change in quantity demanded of a given good and change in its price (Pauly, 2013). Factors that affect price elasticity of demand include the availability of substitutes for the good, the proportion of income spent on the commodity, the number of uses the commodity has, the durability of the product and whether the commodity is a necessity or a luxury. A commodity may be termed as having inelastic demand if changes in quantity demanded are not affected by variations in the price. Demand can be termed as elastic when PED ›1.This can be illustrated as below:
Change in price of a laptop: increase by 20%
Change in quantity demanded: 40%
Price elasticity of demand= Change in quantity demanded/Change in price of the good
This shows that the demand for laptops is price elastic.
Change in price of a packet of cigarettes: increase by 10%
Change in quantity demanded: drop by 5%
Price elasticity of demand= 5%/10% = 0.5
This shows that demand for a packet of cigarettes is elastic.
Of the two examples, the demand for laptops is more price elastic than that of cigarettes as it has a higher value for its price elasticity. [Click Essay Writer to order your essay]
The importance of elasticity in a business can be divided into business decisions and production decisions. For the business, knowledge on the elasticity of demand for a product can enable them to predict sales revenue (Pauly, 2013). This would be substantial for budgeting and other organizational purposes. Knowledge on the elasticity of demand enables a business to plan a tax shifting strategy, i.e., if a commodity has elastic demand, the tax will be shifted back to suppliers while a product with inelastic demand will have the burden of tax shifted to the consumer. Finally, the most critical need for knowledge on pricing is to inform a business’ pricing strategy. Overpricing of goods with elastic demand will lead to a fall of the application for the good while inelastic demand allows management to increase the price of the good (Tellis, 2014).[“Write my essay for me?” Get help here.]
The best time of the year to raise flower prices would be that time when demand for flowers is high. This would include festive seasons, public holidays and romantic holidays such as Valentines. This is because raising flower prices at a time when demand is low would lower the demand even further. Flowers are perishable goods and therefore cannot be stored for extended periods of time in anticipation of an increase in prices (Tellis, 2014). The business would benefit most from periods of high demand; losses due to spoilage would be decreased.
The elasticities in the flower business are income and cross elasticities. Cross-elasticity is the degree of responsiveness of the demand of the quantity demanded of one good to changes in the price of another good (Tellis, 2014). Income elasticity, on the other hand, is variations in the request of a right that is influenced by changes in income of consumers; because flowers can be classified as luxuries as opposed to necessities, the income consumers are willing to spend have a significant influence on the total demand for flowers at a given time.[Need an essay writing service? Find help here.]
Pauly, M. V., & National Bureau of Economic Research. (2013). Price elasticity of demand for term life insurance and adverse selection. Cambridge, MA: National Bureau of Economic Research.
Tellis, G. J. (2014). The price elasticity of selective demand: A meta-analysis of sales response models. Cambridge, MA: Marketing Science Institute.