Custom «Pricy Painting» Essay Paper Sample
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The price elasticity of demand (PED, ED) is one of the basic notions of economics. It enables us to utilize the supply and demand curve in the analysis of the markets of goods by measuring how the quantity demanded of a good or a service responds to a change in the price. "More precisely," wrote Samuelson and Nordhaus (1998) "it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand)" (p.62).
This short study aims to give a brief overview about the price elasticity of demand through analyzing it from the prospect of our preset task.
1. The solution for the given example - the calculation of the price elasticity of the demand
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Our first, general formula defines the price elasticity of demand as the quotient of the percentage change in quantity demanded and the percentage change in price.
The percentage change in quantity is not other than ΔQ divided by Q (where ΔQ= Q2-Q1 and Q is the average of Q1 and Q2) and the percentage change in price equals to ΔP/P (where ΔP= P2- P1 and P is the average of P1 and P2).
Even though ΔQ is a negative number in our case (-15), the negative value is to be ignored, because the absolute value of the number concerns us while we analyze elasticity.
2. Demand- elastic, unitary elastic or inelastic?
The elasticity of the demand is being described by the above- mentioned 3 big categories.
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Firstly- according to Samuelson and Nordhaus-, if 1% price change modifies the demanded quantity by more than 1 %, the demand is elastic.
Secondly, the demand is unitary elastic when 1% price change causes exactly 1% change in the demand.
Finally, the demand is price inelastic if 1% price change causes less than 1% change in demand.
In the case of our item the price elasticity of demand was calculated to be 3,55, so the paint is price elastic.
3. Interpreting the price elasticity of demand
On the one hand, the result of the calculations (3,55) indicate how sensitive is the demand for a certain good to a price change. When the demand is entirely inelastic (ED= 0), not any price change can affect it (the demand curve is vertical). When it is entirely elastic, even very insignificant changes in price can cause a surprisingly significant modification in demand (the demand curve is horizontal).
On the other hand, the price elasticity of demand also suggests how the price change will affect the total income. If the demand is price elastic, like in the case of the paint, the total income will rise as the prices fall and fall when the prices rise.
All in all the increasing price of the paint causes the painters' demand for it to drop drastically and thus the paint manufacturers' total income to fall, too. It is the 'unseen hand's' task to find the equilibrium price and soothe the imperfections of the market.