Price Elasticity Research Paper

Price elasticity is the measure in responsiveness of consumers to changes in the price of a product or service. Price elasticity is defined as of supply or demand, "the ratio of percentage change in a goods supply or demand to a given change in price, other things being equal." The evaluation and consideration of this measure is a useful tool in firms making decisions about pricing and production, and in governments making decisions about revenue and regulation. By properly considering price elasticity managers can set pricing in such a way that the effect on total revenue is predictable and adjustments to production are timely. The concept of price elasticity is employed by managers for most business decisions.

Products can have elastic …show more content…
The electric utility industry is regulated to control rate increases because the nature of the demand for electricity is highly inelastic, and a monopolistic electrical supplier could manipulate pricing knowing demand was unable to change in response. State and Federal governments have historically chosen inelastic products to impose taxes upon, such as fuel, cigarettes, and alcohol; principally to maintain a steady revenue flow from products with consistent demand, as well as selecting products whose demand is not easily influenced by price or other external economic factors. Price Elasticity is used by governments in the use of taxes or tax incentives on elastic products to impact demand and promote agendas. This provides opportunity for policy to be enforced using market mechanisms instead of strict regulation. In providing a tax credit for the purchase of electric vehicles, many states are using the tax credit to counter the price inelasticity of gasoline by providing a means encourage a viable substitute and as a consequence, forward the policy of reducing the use of higher-polluting motor fuels. In these circumstances, the Government uses the concept of price elasticity to manipulate consumer demand in a direction that current policies might require.

In summary the principles of Price Elasticity are used by commercial firms such as consumer products, refineries, airlines, and fashion retailers. The concept of Price Elasticity is also used in managing government as well for issues such as taxation, regulation, and the setting of fees. In general, the concept of Price Elasticity is a central tenant of understanding the pricing and demand for products and services, and is applicable to any