Question

Explain elasticity in 3 paragraphs, give three examples of different situations and how the price sensitivity would be different. Explain in the writing why elasticity is important and why understanding elasticity in business is essential.

Answer 1

Elasticity of Demand

The elasticity of demand, or demand elasticity, refers to how sensitive demand for a good is compared to changes in other economic factors like price or income. It is commonly referred to as price elasticity of demand because price is the most common economic factor used to measure it.The elasticity of demand helps companies predict changes in demand based on a number of different factors including changes in price and the market entry of competitive goods.An elastic product is defined as one where a change in the price of the product leads to a significant change in the demand for that product. Elastic products have substitutes.

It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. If the elasticity quotient is greater than or equal to one, the demand is considered to be elastic.

A common example of an elastic product is gasoline. As the price of gas increases and falls with the international market, the demand (the distance driven by the population) rises and falls in near direct correlation. Gasoline has an elasticity quotient of one or greater and has a flatter slope on a graph.

Examples include:

Heinz soup. These days there are many alternatives to Heinz soup. If the price rises, people will switch to less expensive varieties.

Tesco bread. Tesco bread will be highly price elastic because there are many better alternatives. If the price of Tesco bread rises, consumers will switch to alternatives, such as Kingsmill.

Daily Express. If the Daily Express increases in price, there are similar newspapers people will switch to. For example, the Daily Mail or Daily Mirror. If it was a newspaper like the Financial Times of the Economist, demand would be more inelastic, as there is no close substitute to the Financial Times.

Kit Kat chocolate bar. If Kit Kats increase, people will switch to alternative types of a chocolate bar.

Price elasticity of demand measures the responsiveness of quantity demanded for a product to a change in price. It is one of the most important concepts in business, particularly when making decisions about pricing and the rest of the marketing mix.

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