In: Economics
Define price elasticity of demand. b. How would the "elasticity of umbrellas" be defined? Assume that the elasticity of umbrellas relates the number of days of rain to the number of times you use an umbrella
Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change. Expressed mathematically, it is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Price elasticity is used by economists to understand how supply or demand changes given changes in price to understand the workings of the real economy. For instance, some goods are very inelastic, that is, their prices do not change very much given changes in supply or demand, for example people need to buy gasoline to get to work or travel around the world, and so if oil prices rise, people will likely still buy just the same amount of gas. On the other hand, certain goods are very elastic, their price moves cause substantial changes in its demand or its supply.
On a rainy day, umbrellas will be having an inelastic good because it is a necessity. People would buy an umbrella even if its price is too high because they don't want to get wet. On the other hand, umbrellas would have more elastic demand during sunny days. Generally, people would not demand them,
The number of times we use an umbrella makes it less elastic, If you use the umbrella more times, it will be inelastic. If you use umbrella less, it would be more elastic.