Price Elasticity of Demand Coursework Example | Topics and Well Written Essays - 1750 words

Price Elasticity of Demand - Coursework Example   For example, if the price of fuel increase by 20%, the reaction would be that the demand for new Vehicles that are fuel inefficient will reduce by 40% and therefore cross elasticity of demand will Be -2 (-) cross elasticity represents two commodities that are complementary, while (+) cross elasticity represent two substitute commodities. In above example, the two commodities, fuel and vehicle are complements to mean that one commodity is used by the other. In such a case, cross elasticity of demand is (-) as evidenced by a reduction in demand for vehicles when fuel price is raised. Everybody needs salt in food and nothing else can substitute salt. Therefore, when the price of salt goes high, then more is spent on it. Also, the same case would be for people who want to build stronger and permanent stone buildings. They must need cement and therefore if the price of cement increases, more will be spent on it rather than thinking of adjusting to another product. Two commodities are substitutes when the cross elasticity of demand is (+) to mean that when the price of one commodity increases, the demands of the other commodities rise. For instance, if the company that makes Rhino matches increase their prices significantly, then the customers are most likely to adjust to other types of matches rather than paying more for the same Rhino match at an increased price. The same would apply if the Sony Company that manufactures electronics increases the prices of their products, customers will opt for similar products manufactured by different companies and which are sold at a fair price. This is because the other companies can produce substitutes that meet the customers’ demands. Elasticity determinants: the availability of substitutes, substitutability, and time has to be put into consideration because even with the increase in prices and the customers turning to substitutes, every business will continue running. Hence, for the commodities with many substitut es, the merchant will have to create special offers from time to time to attract the customers unlike the commodities with inelastic demand. Then some products like salt signify a minute portion of the customer’s financial plan resulting in reduced concentration being given to its price. Also if a commodity is the only option in the market, then its substitutability becomes very minimal. e.g roller skates. If they are the only skating gadgets then the customers will not be very perceptive to its price variations since, after all, they require them for skating.