What Do You Understand By The Own Price Elasticity Of Demand For A Good?

922 words - 4 pages

What do you understand by the own-price elasticity of demand for a good?

1. (a) What do you understand by the own-price elasticity of demand
for a good?

(b) Will a linear (straight line) demand curve have a constant
own-price elasticity of demand? Explain your answer.

(c) Following the terrorists attacks in the USA on 11 September, there
was a marked fall in business travel. In respomse, many hotels cut
their prices to business travellers; for example the Hyatt Hotel group
offered discounts of up to 50 per cent off regular room rates. Under
what circumstances would this lead to increased revenue for these
hotels?

Before we define the meaning of the own-price elasticity for a good we
must understand elasticity and its concept in general. Elasticity is
basically a comparison between the sizes of change in the quantity
demanded, in the case of the own-price elasticity, of a certain good
and in the variable that caused this change. According to Mankiwelasticity
is a measure of the responsiveness of quantity demanded or quantity
supplied to one of its determinants. The law of demand implies that an
increase in a price of a good will subsequently lead to a fall in the
quantity demanded for that good. The formulae which calculates this
amount is the division of the percentage of change in quantity
demanded by the percentage of change in price. The sign of price
elasticity of demand, and elasticity as well, is always going to be
negative due to the fact that quantity and price demanded are usually
in opposite directions. Elasticity is going to be negative as well
since neither the percentage change in price nor the the percentage
change in quantity are going to be positive according to which one
will rise or fall. Despite that, elasticity will be treated always as
a positive figure in order to avoid inconvience when dealing with
price elasticity of demand. There are five different ranges of
variance of price elasticity of demand and the first one occurs when
demand is elastic. This is happening when the value of the price of
elasticity of demand is positive and the percentage change in quantity
is larger than the percentage change in price. This is an indication
of demand responding to the change of the price of a ceratin good. The
second range occurs when demand is inelastic. This happens when the
PED value is less than one and the percentage change in quantity
demanded is smaller than the percentage change in price. This shows
that demand does not respond to the change of the price of a good. The
third range occurs when demand is unit elastic. This happens when the
PED is equal to one and the percentage of the change in quantity
demanded is equal to the percentage of the change in price. This
indicates that demand remains the...

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