Price Elasticity Of Demand

Chapter 5 explored the significance of price in an economy in determining the market demand. Demand of a commodity is a consumer’s willingness and desire to pay a set price for a specific commodity or service. The indifferent curve is also explored in the chapter as a representation detailing different consumer baskets containing one or two goods with similar levels of satisfaction termed as utility. Indifference curves always run parallel to one another since a single combination cannot yield two different levels of satisfaction. It is assumed that each unit of any of the two product yields a positive benefit to the consumer thus, it follows that any combination of products that has more of both goods will yield higher total benefits than …show more content…
The substitution effect on the other hand, is the change of price of one good on the curve, which leads to a movement along the indifference curve compensating for the change in consumer bundle to a new equilibrium. However, there are exceptions to the substitution and income effect mainly for the inferior goods.
Price elasticity of demand. The relationship between price and demand can be described using the elasticity of demand. Essentially, it is a gauge to show the changes and direction of the demand relative to price changes. Empirically, it explores the percentage change in the quantity of the product demanded divided by the percentage change in the price of the same product. If the percentage change in quantity demanded exceeds the percentage change in price, then the
When the demand curve is vertical, it is said to be perfectly inelastic since the quantity demanded is unresponsive to any price change. When the demand curve is horizontal, then the demand is termed as perfectly elastic because if the price were to increase the demand of the commodity would fall to zero and the opposite is