# Demand elasticity of that good is 2, which indicated

Demand
can be defined as ability and willingness to pay for the good or
service. Most of us desire to purchase or own more than we are able
to, however the demand definition states that it is the amount of
good or service that consumers want to buy for a given price
(Economics, 2009).
The
law of demand says that, when other things are being equal, the
demand for a good will decline if the price is raised and rise if the
price is reduced, which can be showed in a graph A.
The
picture above tells how many goods the consumer is willing to buy at
given price. The demand curve is downwards sloping, indicating that a
higher price reduces the quantity of the good demanded. The demand
can be effect by few things. Not only the price of the particular
good effects the demand of that good, also the price of complementary
goods and price of substitutes, income levels and taste. Movements
along the demand curve is caused by the price change, although the
other factors are causing the shift of the demand curve, either to
the rights or to the left, depending which factor it is.

The
responsiveness of the quantity demanded to a change in the price of
that good is called elasticity.

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The
elasticity lets us measure and interpret how decrease or increase of
the price of the good, effects its demand. The price elasticity of
demand, shorted PED, can be calculated with the formula:

%
change in Quantity demanded (Q)
______________________________

%
change in Price (P)

Suppose
that 20% increase in price of the good causes 40 % less of that good
will be sold.

40%

PED
= ———– = 2.
20%

The
elasticity of that good is 2, which indicated that Price of
Elasticity Demanded is elastic. The change in quantity demanded is
twice as big a the change in the price. Because the quantity demanded
of the good is negatively related to its price , the percentage
change in quantity will always have the opposite sign as the
percentage change in price. (Essential of Economics, 2015)
To
calculate the value of the PED we check which number is bigger and
not if it is a plus or minus sign before it.

There
is five meanings of the Elasticity Measurements. Price Elasticity of
Demand can be elastic, as showed in the example, which means that
demand is responsive to a change in price. When 20% of the price
increase causes 40% decrease of quantity demeaned. The demand curve
is elastic when the price change, fall or increase, causes meaningful
retraction in demand of that good. The value is elastic when price
elasticity of demand is less than 1. When small price increase causes
big decrease in quantity demanded means that good is very responsive(
it is be demonstrated in the graph B)

When
the value of the Price Elasticity of demand is more than 1, it means
that the good is inelastic. Demand is not very responsive to the
change of price. Significant increase of price causes only small fall
in demand. For example 40% increase of price causes only 10% decrease
in quantity demanded. (This behaviour is illustrated in the graph C)

When
the Price Elasticity of Demand value equals 1, the good has unit
elasticity. This situation happens when percentage change in quantity
demented is the same as percentage change in price. For example when
5% increase of price will cause 5% decrease of quantity demanded.

The
good is perfectly inelastic when Price Elasticity of Demand equals
zero. The change in price has no effect on quantity demanded, which
is illustrated as vertical demand curve.

The
Price Elasticity of Demand is is Perfectly Elastic when equals
infinity. It accrues when any change of price of the good causes
quantity demanded fall to zero. In this situation the demand curve is
horizontal as presented in the graph below.

Calculating
Price Elasticity of Demand shows how total revenue changes when price
changes. Increase of price does not necessary means increase of total
revenue.
When
the demand curve is inelastic (see graph below) an increase in price
causes proportional fall in quantity demanded which leads to higher
total revenue. Price increase from €8 to €10 makes quantity
demanded decrease from 200 to 180. In this case total revenue goes up
from €1600 to €1800

In
the case when demand curve is elastic, an increase in the price
causes fall in quantity demanded. In this situation total revenue
falls. When price goes up from €8 to €10, quantity demanded
decreases from 200 to 80. Total revenue falls from €1600 to €800.

The term “price elasticity of demand” might not be very common
but it is frequent used by firms, organisations and government in
decision making. Knowledge of the basic law of demand is not enough
to decide about final price of the product or service. It has to be
measured how change of the price will affect the final outcome.
Public
policy making uses elasticity to imposes tax on goods like
cigarettes, alcohol or petrol.
Those
products are inelastic, they have not many substitutes, are essential
or addictive. When the price goes up, the quantity demanded does not
fall significantly. Those goods are not responsive to a price change,
which means demand will still be high regardless raised price.

One
of the examples of the use of the Elasticity of demand can be Price
Reticulation and Crop Restriction of Farm Products used by
governments of many countries. In United States of America the
Government encourage farmers to limit agriculture production by
offering them grants. The demand of the farm products is inelastic
and big supply of those products causes fall of the price which
lowers farmers incomes. The government enacted policy restricting
farm production and provides subsidy to those who keep their land not
cultivated. This policy reduces supply in the market which causes the
price of those products rise. Agricultural products are inelastic and
the fall in production leads to increase of the revenue and farmers
incomes.

The graph above
illustrates how farmers revenue equals to the OP1, E1,Q1. After
implementation of the Governments rules, supply shifts to the left.
(Supply curve is assumed to be perfectly elastic to simplify the
case). When agricultural products price increases to P2 and quantity
demanded decreases to Q2 the new revenue is OP2,E2,Q2 and it is
higher than what it was before governments regulations which
increased farmers incomes.