Economics Elasticity Essay -- Price Elasticity of Demand

Businesses know that they face demand curves, but rarely do they know what these curves look like. Yet sometimes a business needs to have a good idea of what part of a demand curve looks like if it is to make good decisions. If Rick's Pizza raises its prices by ten percent, what will happen to its revenues? The answer depends on how consumers will respond. Will they cut back purchases a little or a lot? This question of how responsive consumers are to price changes involves the economic concept of elasticity. Elasticity is a measure of responsiveness. Two words are important here. The word "measure" means that elasticity results are reported as numbers, or elasticity coefficients. The word "responsiveness" means that there is a stimulus-reaction involved. Some change or stimulus causes people to react by changing their behavior, and elasticity measures the extent to which people react. The most common elasticity measurement is that of price elasticity of demand. It measures how much consumers respond in their buying decisions to a change in price. The basic formula used to determine price elasticity is: If price increases by 10%, and consumers respond by decreasing purchases by 20%, the equation computes the elasticity coefficient as -2. The result is negative because an increase in price (a positive number) leads to a decrease in purchases (a negative number). Because the law of demand says it will always be negative, many economists ignore the negative sign, as we will in the following discussion. An elasticity coefficient of 2 shows that consumers respond a great deal to a change in price. If, on the other hand, a 10% change in price causes only a 5% change in sales, the elasticity coefficient .. ...tical supply curve. For example, if on December 1 the price of apples doubles, there will be minimal effect on the number of apples available to the consumer. Producers cannot make adjustments until a new growing season begins. In the short run, producers can use their facilities more or less intensively. In the apple example, they can vary the amounts of pesticides, and the amount of labor they use to pick the apples. Finally, in the long run not only can producers change their facilities, but they can leave the industry or new producers may enter it. In our apple example, new orchards can be planted or old ones destroyed. Source Consulted Vitali Bourchtein "The Principles of Economics Textbook: An Analysis of Its Past, Present & Future" May 2011 Web 15 May 2015. http://www.stern.nyu.edu/sites/default/files/assets/documents/con_042988.pdf