ECONOMICS UNIT 2 IP 2

Computation of the Price Elasticity of Demand of Apples

1 .2 Explanation and Classification of Price Elasticity of Demand of Apples

As we can see , the point price elasticity of demand is classified as an elastic demand , because the percentage change in quantity demanded is in a higher proportion than the percentage change in price . Therefore an increase in price will lead to a higher decrease in quantity demanded

The price elasticity of demand of a product is influenced by a number of economic factors present in the market . The most important

one is the availability of substitute goods . The greater the availability of substitute goods , the higher the elasticity of demand , since the client will shift to other similar products to satisfy his need . For instance apples face a vast number of substitute fruits , directing to an elastic demand . It is also important noting that the effect of substitutes is highly susceptible to how `substitute products ' are defined . Normally the more specific the definition the higher the number of substitute products

Demand is also affected by the value of the product . The less expensive the commodity , the lower the elasticity of demand , because customers will be less sensitive to changes in price . In this case , apples are a low cost product , thus lowering the responsiveness of demand elasticity

In business , it is important to analyze the price elasticity of demand because it is a vital element that influences the revenue of the organization . Under the theory of the firm model , we always presume that the ultimate objective of the entrepreneur is to maximize profits Therefore it is essential to examine thoroughly the effect on revenue of the price elastic demand of apples . Increases in prices of apples will lead to a loss in revenue , because the decrease in the quantity demanded is in a greater proportion than the rise in price . Therefore the change in price adopted in this case is not economically rational and should be adjusted as soon as possible References

Hirschey M Pappas J (1995 . Fundamentals of Managerial Economics Fifth Edition . United States of America : The Dryden Press

Maunders

Myers D Wall N Miller L . R (1991 . Economics Explained . Second Edition . Glasgow : Harper Collins Publishers

Pemberton J (1989 , Marshall 's Rules for a Derived Demand : A Critique and a Generalisation , Scottish Journal of Political Economy , Vol . 36 Issue 4

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PRICE ELASTICITY OF DEMAND OF APPLES...