Price Elasticity Of Demand Term Paper Example | Topics and Well Written Essays - 1250 words

Price Elasticity Of Demand - Term Paper Example There are two main reasons why we use percentages instead of absolute amounts. They are;  Ã¢â‚¬ ¢ If absolute changes are used, the choice of units will be arbitrary affect the impression of the consumers’ responsiveness. (Lipsey R.G and Christal K.A2007pp66) For example, if the price of cereals changes from $10 to $9 and the quantity demanded changed from 60 to 100 packets. The coefficient of price elasticity of demand will be 40. It will be seen that consumers are very sensitive to price change and the demand will be elastic.   But if the monetary units are changed from dollars to pennies we see that change of 100 pennies causes a change of 40 packets of cereals.   This will falsely make people believe that demand is inelastic. To eliminate this problem percentage changes are used. (Lipsey R.G and Christal K.A2007pp66)  Ã¢â‚¬ ¢ By using percentage, consumers’ responsiveness to price changes of different products can be easily compared. For example, if two prod ucts are taken i.e. cereals and computers. It is easier to compare the effects on quantity demanded of $1 increase in the price of a $300 computer and $1 dollar increase in the price of $1 soft drink.  Various interpretations of price elasticity of demand coefficient  Ã¢â‚¬ ¢ When Ed>1, the demand is said to be elastic. This occurs when a specific change in price results in a larger percentage change in quantity demanded.(Mankiw N.G,1998p93) Graphically it can be illustrated as follows;