Demand is elastic if a change in price leads to a bigger percentage change in demand; therefore, the PED will be greater than one. When the PED is greater than one, the good is considered as price elastic and this shows meaning that the demand is responding to price change. However, if the PED is less than one, the commodity is considered as inelastic. If the PED equals one, the commodity is considered as having unit elasticity therefore, percentage change in demand is equal to the percentage change in price. If the PED is equal to zero, the commodity is said to be perfectly inelastic. This is to mean that any changes in price will in no way affect demand for the commodity. However, if the PED is infinity, the commodity is considered as being perfectly elastic. This is to say that any price change will reduce the demand for the commodity to zero as supported by McAuliffe (1981, p. 29).
A number of factors determine Price of elasticity of demand. One of these factors is the number of close substitutes within the market. The more and closer the substitutes are in the market, the more elastic the demand for the commodity is. The substitution effect therefore highly affects PED.
Luxuries and necessities also affect PED. Necessities are generally more inelastic as compared to luxury commodities, which are more elastic. Necessities include our basic needs like food commodities.
The percentage of income spent on a commodity also affects PED. Often the case if small proportion of income is spent on a commodity, comes more inelastic. Habit-forming goods are also another factor that affects PED. Drugs and other addictive commodities like cigarettes tend to be inelastic. This is to say that habitual consumers of certain commodities tend to be insensitive to any price changes. Time under consideration tends to affect PED, as demand is more elastic in the end rather than in the short run.
Hirshleifer (2005, p.136) states that cross elasticity of demand (CPed) is used to measure how demand for a product responds to change in price of other related products. To determine the CPed, focus is mainly on the relationship between changes in the prices of substitutes and the complements. Increase in price of one substitute good will lead in demand for a rival product. In this case, CPed will be positive. With goods that are in complementary demand, e.g. decrease in prices of ink pens will lead to an increase for ink bought since more people will buy the pens. However, if there is no relationship between two commodities, the CPed will be zero.
Income elasticity demand is used to measure the relationship between changes in quantity demanded vs. the change in income. Income elasticity of demand changes between normal goods, necessities, luxuries, and inferior goods. Income elasticity of demand depends on various products, as customer preferences for different products tend to vary. For example, what some people consider a luxury may actually be a necessity to others. Spending decisions between individuals also vary. Income elasticity for demand also changes with time, as most market products do not have an infinite life cycle. Consumer preferences will also be affected by other consumers over time an also availability of newer products. E.g. there are so many inventions in telecommunications for example phone come in different shapes and colors and preferences for an individual will likely be influenced by these changes.
Actions to reduce price fluctuations A number of actions are available for companies and countries to reduce price fluctuations. The main causes of price fluctuations are forces of supply and demand. i.e. when supply is high and demand is low, prices lower and when supply is low and demand is high, prices go up. Price fluctuations affect business stability and it is therefore important to make sure that prices do not fluctuate very often. One good way of limiting pricing fluctuations is through a pricing strategy (Karl,
Analysis Of The Banana Market In Australia Economics Essay
In a perfectly competitive market, there is no government intervention in the market. The price is usually established when the equilibrium price and quantity is achieved (Jackson,J