Question

Select two different products, one which has high price elasticity and one which has low price elasticity. Compare and contrast the demand factors which impact pricing of those products.

Answer 1

Elasticity of Demand = %change in quantity demanded / %change in price

If %change in quantity demanded > %change in price, demand is elastic.

If %change in quantity demanded < %change in price, demand is inelastic.

• Inelastic goods are necessary goods while elastic goods are luxury goods, a fall in income level will raise demand of inelastic goods which induces producers to charge a higher price and retain maximum profit.
• Rise Price of inelastic goods does not change its quantity demanded while rise in price of elastic goods change its consumption by a considerable amount.
• A good with many uses have elastic demand, fall in price of which will result in rise in its demand.
• Good with its substitutes available in the market is elastic, rise in its price will reduce the demand of it because consumers always look for cheaper alternative.