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The formula is: percentage change in quantity demanded over the percentage change in price. PED has – (negative) sign in front of it; because as price rises demand falls and vice-versa (inverse relationship between price and demand). Determinants of PED are the availability of substitutes and time. PED have some links with changes in total expenditure (Anderton 2008).
Example: After increasing price from P1 to P percentage change in price was 10, demand for good X is decreased from Q1 to Q and percentage change in quantity demanded is 60, what is price elasticity of this good?
Solution: Formula is %Q / %D, so 60/10=6. PED is greater than one so its elastic good.
Elastic demand curve of the Good …show more content…
However, if the goods are substitute or complements, the change of price in one of them, may lead to change in another. Cross elasticity of demand measures this kind of changes (Anderton 2008). Good which are substitutes will have a positive cross elasticity, and if goods are complement, it will have a negative cross elasticity. If the goods have a small relationship between each other the may have a zero cross elasticity. For instance a rise in demand for luxury cars, likely may have no effect on Tipp-Ex. Demand is cross elastic if it is between +1 and -1, if cross elasticity is greater than +1 or less than -1, then it is …show more content…
Negative impact of this change is that consumers can react on higher price of good, and decrease the demand, so in the end there will be excess supply (Parkin 2010). However, there is two solutions for excess supply. One of them is to buy the extra production by the government and sell it back in low prices, sale it to farmers for their animals, offering it to those who in need this good in EU or to sell it to Third World countries at rock bottom prices (Parkin 2010). Another way to solve it is to restrict the production. The government can force the farmers to leave the part of their land uncultivated(Parkin 2010). This can lead to shifting the supply curve to the left. Reducing output to achieve higher prices is the way in which OPEC works(Parkin
Example: After increasing price from P1 to P percentage change in price was 10, demand for good X is decreased from Q1 to Q and percentage change in quantity demanded is 60, what is price elasticity of this good?
Solution: Formula is %Q / %D, so 60/10=6. PED is greater than one so its elastic good.
Elastic demand curve of the Good …show more content…
However, if the goods are substitute or complements, the change of price in one of them, may lead to change in another. Cross elasticity of demand measures this kind of changes (Anderton 2008). Good which are substitutes will have a positive cross elasticity, and if goods are complement, it will have a negative cross elasticity. If the goods have a small relationship between each other the may have a zero cross elasticity. For instance a rise in demand for luxury cars, likely may have no effect on Tipp-Ex. Demand is cross elastic if it is between +1 and -1, if cross elasticity is greater than +1 or less than -1, then it is …show more content…
Negative impact of this change is that consumers can react on higher price of good, and decrease the demand, so in the end there will be excess supply (Parkin 2010). However, there is two solutions for excess supply. One of them is to buy the extra production by the government and sell it back in low prices, sale it to farmers for their animals, offering it to those who in need this good in EU or to sell it to Third World countries at rock bottom prices (Parkin 2010). Another way to solve it is to restrict the production. The government can force the farmers to leave the part of their land uncultivated(Parkin 2010). This can lead to shifting the supply curve to the left. Reducing output to achieve higher prices is the way in which OPEC works(Parkin