Price Elasticity Essay

Published: 2020-02-21 06:01:27
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Category: Microeconomics

Type of paper: Essay

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There are several examples that come to mind when I think of price elasticity. Included in my list are fuel, cigarettes, electricity, and toilet paper. Price elasticity means that the behaviors of supply and demand are not affected when the price of that particular item rises (changes). Our local power companies experience price elasticity on the energy that we demand, when they continually raise prices but the amount of consumer usage is unaffected.

In some parts of the country their may be alternatives such as gas heat and fire places which would all contribute to less usage thereby decreasing the likelihood of the price of being inelastic since there would be substitutions. So, rate increases to our power bills increases revenue for the power companies. There is little to analyze since there are no complements. The demand for energy is inelastic so total revenue increases. Elasticity is when there are few variables to change the consumption habits in this particular example, thereby resulting in increased total revenues.

However, when there are considerably more variables affecting supply and demand; substitutions is one variable that may actually cause a decrease in total revenue because the price of power has now become elastic when consumers refuse to use power because of the rate increases and they have an alternative source. According to our text and investopedia price elasticity means that supply and demand are affected by changes in the price of an item. A small change in price is accompanied by a large change in demand for the product when the product is elastic.

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