Keywords: price elasticity circumstance study
This project will verify one of the main concepts in the complete of economics - elasticity. It is the responsiveness of one varying (demand or resource) to a big change in another (e. g. price). This concept is elementary to comprehending how markets work. The most frequent elasticities used include price elasticity of demand, price elasticity of source, cross-price elasticity of demand and income elasticity of demand.
The economic options of how much the number demanded changes when the purchase price changes is named price elasticity of demand. This response can be determined by divided the percentage in variety by the percentrage change in cost. It will always be conclude negative. Determinants that affect price elasticity of demand include the amount and closeness of alternative goods, the percentage of income allocated to the nice and the period of time. They are immediately related to the elasticity coefficient. Price elasticity of supply is a way of measuring how much the number provided changes when the purchase price changes. It is the percentage of the percentage change in variety supplied to the percentage change in price. It is usually positive. Source is determined whether flexible or inelastic depends upon two main determinants: the ability of sellers to improve the quantity of the good they produce when the purchase price changes and the period of time.
Price elasticity can be used to predict the effect of a change in price on the full total revenue and expenditure on something or the effect of any change in a gorvernment indirect tax on price and variety demanded.
Income elasticity of demand actions the rate of response of number demanded scheduled to a increase (or lowering) in consumers income. It will be more elastic the more luxurious the good and the less demand is satisfied as consumption increases. It is an important idea to firms considering the future size of the market for his or her product.
Finally, the task will study the truth of demand for smoking in Vietnam and the ways are being thought to reduce the amount of men and women smoking from elasticity point of view.
I. INTRODUCTION
A shoe shop decided to have a deal. It sells more shoes but ingest less overall per set sold. Will it gain or lose income form the sales? How does an enterprise determine whether to boost the price of the product it sells in order to increase earnings? Those questions relate to how responsive consumers are to price changes consists of one of the main concepts in monetary theory - elasticity. It is a way of measuring responsiveness, a spot to which a demand or resource curve reacts to an alteration in price. Understanding elasticity theory is useful and essential in comprehending an exceptionally wide selection of applications in economics including the occurrence of taxation, welfare syndication or especially, the response of resource and demand in a market. The common elasticities used include price elasticity of demand, price elasticity of resource and income elasticity of demand will be mentioned more details below.
II. ELASTICITY
To determine the elasticity of the source or demand curves, this equation can be utilized:
Elasticity = % change in variety / % change in price
Elasticity varies among products scheduled to different degree of neccessities among products may be to the consumers. Something is considered to be flexible when a change in cost leads to a change in the number demanded or offered. Normally, these types of products are easily available in the market and people might not exactly need them very much in their daily life. Alternatively, an inelastic product is one in which changes in price only cause moderate changes in the quantity demanded or provided, if any in any way. These goods have a tendency to be things that are extremely necessary to consumers in their lifestyle.
III. PRICE ELASTICITY OF DEMAND
If a female was about to have meat for meal and were enlightened by owner that the price tag on it has been increased by 10, 000 VND because of the rise if feed cost and low resource. Would she still buy beef for lunch? Given that her street bike has run out of gas, as she reached the gas stop, she saw the price tag on it offers risen by 450 VND per litre. Does indeed she still gas up? The answers to these questions may carefully relate to the price elasticity of demand.
1. Definiton
Price stretchy of demand displays the responsiveness of quantity demanded for something when its price changes (Sloman, 2007).
2. Measuring the price elasticity of demand
Price elasticity of demand can be assessed by divided the percentage change in variety by the ratio change in price (Sloman, 2007):
ed = % change in quantity demanded / % change in price
3. Interpreting the amount for demand elasticity
The demand curves generally have downward sloping movements as a rise in cost will lead to a fall season in number demanded and vice versa. Then when measuring the price elasticity of demand, a poor figure is actually divided by a positive number and vice versa. Therefore, the purchase price elasticity of demand is always wrap up negative.
Demand is elastic if the ratio change in variety demanded is greater than the ratio change in price (ed > 1), product stretchy if both is equivalent (ed = 1), inelastic if the ratio change in quantity demanded is significantly less than the ratio change in price (ed>1). Furthermore, there are two more extreme cases : perfectly elastic when a demand curve is horizontal and demonstrates percentage change in variety demanded is infinite with regards to the ratio change in cost (ed = Л†); properly inelastic shows a condition in which the quantity demanded will not change as the purchase price changes (ed = 0).
4. Determinants of price elasticity of demand
There are several factors that have an impact on the purchase price elasticity of demand of certain goods. Returning to the example above, many people would not buy beef but switch to some other meat such as poultry, pork or fish (or do not buy any further) if prices increased by 10, 000 VND. However, they doubtlessly would still fill their bike with gas even if the purchase price were increased by 450 VND per litre. That's because meat and fuel have very different price elasticity due to variety determinants.
First, the quantity and closeness of substitute goods. The more alternatives a good has, and the better they are, the greater choices people will have when the price of the nice increase. Therefore, the purchase price elasticity of demand will be higher like the example of meat and fuel above. The demand of meat is stretchy as it has many substitutes but gas does not have any close alternative so its demand is inelastic.
Next, the proportion of income allocated to the nice. If the nice consumes a relatively big proportion of people's income, price changes will substantially affect the total amount people buy. For instance, a person have to pay a quite large amount of his money for electricity monthly bill, if the purchase price increase of 50 percent (say it can get to 1, 500 VND per one kilowatt electricity), probably it could affect the number used greatly. He is able to be required to cut back the electricity used in month.
Time period is also a vital determinant in cost elasticity of demand. In the brief run, people may have no choice but agree to price changes. However, in the long run, they can adapt their consumption in the best effective ways. Take types of gasoline again. Demand of computer at this time is high inelastic because people still have to drive their vehicles. As time passes, as the gas price remains higher, new fuel-efficient motorcycles or cares can be innovated for folks or they can move nearer to work.
5. Elasticity of demand and total revenue
Total consumer costs (TE) is another vital applications of price elasticity of demand. It will be the same as total earnings (TR) received by companies before deducting expenses. Perhaps the simplest way to share with whether demand is flexible, unitary stretchy or inelastic is to see the response of total income as the price of something changes (Layton, et al. , 2005). The diagrams below show different demand curves of price elasticity and the result over a change in the market price.
According to Sloman (2007, pp. 60), when demand is inelastic, an increase in price leads to a rise in total costs of consumers for that good and therefore an increase in the total revenue that the business gets and vice versa.
When demand is stretchy - a reduction in price contributes to a rise altogether expenses of consumers with the good, hence, the business total earnings will rise and vice versa.
When demand is unitary stretchy, neither a growth nor fall in cost affects the full total expenses of consumers for your good, thus, total income of the business remains unchanged.
IV. PRICE ELASTICITY OF SUPPLY
The changes in cost do not only have an effect on the quantity demanded but also the quantity supplied. Therefore, additionally it is useful to understand how responsiveness of quantity supplied to a big change in price by the measure of price elasticity of supply.
1. Definition
Price elasticity of source is the responsiveness of number supplied to an alteration in price (Sloman, 2007).
2. Measuring the purchase price elasticity of supply
Layton, et al. (2005, pp. 133) shown that price elasticity of resource is assessed as the ratio of the ratio change in the number supplied of a product to the ratio change in its price:
es = % change in quantity offered / % change in price
3. Interpreting the figure for supply elasticity
The price elasticity of resource is usually positive because the number producers are willing to supply is straight related to price. The larger the price elasticity of resource, the more reactive the firms that offer the nice or service are to a price change. Source is flexible if the purchase price elasticity of source is higher than 1 (es > 1), product elastic if it is add up to 1 (es = 1), inelastic if it is significantly less than 1 (es < 1), flawlessly elastic when a little change in price changes the number supplied by an infinite amount (es = Л†) and properly inelastic when the number offered is unaffected by the change in cost (es = 0).
4. Determinants of price elasticity of supply
Supply is whether elastic or inelastic depends on two main determinants. First, it depends upon the ability of sellers to change the amount of the nice they produce when the purchase price changes. In the event the marginal cost to produce one more device is extremely high as result increases, then a rise in cost causes little increase in quantity supplied and offer is likely to be inelastic. However, if the marginal cost is low as result rises, it will induce a significant increase in quantity provided. Time is another determinants which plays an important role in the purchase price elasticity of source. McEachern (2009, pp. 111) stated supplying becomes more elastic as time passes as producers modify to price changes. The longer the time for adjustment, the higher the supply reactions. For circumstances, suppliers of gasoline, electricityhave slower response time as expansion of these products might take many years somewhat than suppliers of raincoat vending, house-cleaning serviceas their development might take only days.
V. INCOME ELASTICITY OF DEMAND
John Sloman (2007, p. 65) stated that "used, there are just two other elasticities that are of help and both are demand elasticities". They can be cross-price elasticity of demand and income elasticity of demand. With this task, only income elasticity of demand will be discussed.
Income elasticity of demand
Income elasticity of demand is the measure of the responsiveness of the number demanded to an alteration in consumer income. In particular, it is the ratio of the ratio change in amount demanded of a good to confirmed ratio change in income :
ey = % change in quantity demanded / % change in income
The major determinant of income elasticity of demand is the degree of the "neccessity" of the nice (Sloman, 2007). For a normal good or service, income elasticity of demand is positive (ey > 0). Those are goods or services whose demand heightens as consumer earnings increase (clothes, shoes, mobile phones, movies). Luxury goods (Mercedes Benz S-class, Armani, rings) will have a higher income elasticity of demand than basis goods. A confident ey suggests that when consumers income goes up, they'll buy considerably more of this good.
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For an inferior good or service, income elasticity of demand is negative (ey < 0). Those are goods or services whose demand diminishes as consumer earnings increase (second-hand cars, instant noodles, canned food). It suggests just the opposite that when consumers' income increase, they'll buy good deal less of that good. Income elasticity of demand can be an important concept to firms considering the future size of the marketplace for his or her product (Sloman, 2007). If the merchandise has a higher income elasticity of demand, sale are probably grow promptly as national income go up, but may aslo degrade considerably if the overall economy fall into unhappiness.
VI. Circumstance STUDY
The research of Vietnam Community Health University implies that every year, smoking kills 40, 000 Vietnamese, four times the fatalities from traffic accidents. Total expenses of treating three common diseases affecting smoking include lung tumors, chronic obsttructive pulmonary disease and ischemia heart disease comes to 1, 100 billion VND/season.
According to Mrs. Hoang Anh from Health Bridge Group in Hanoi, at the same brand of cigarette, a pack than it in Vietnam has the cheapest price. The common retail price of tobacco is 0. 22 USD/pack - a price that almost can't be found all over the world. Thus, the youth is better to approach smoking since ciagarettes are too cheap and too simple to buy. In fact, as the reports of SAVY (Study Analysis of Vietnamese Children) in 2003 - 2004, in the age of 14 - 25, 43. 6 percent cigarette smoker is male and 1. 2 percent is feminine, the rate of smokers increase with years. 71. 7 percent male smoker remains smoking. Mrs. Hoang Anh said the reason of low-cost cigarette is because in Vietnam, the taxes imposed on cigarette smoking is among the lowest. Recently, the Who have advised the cigarette duty should be at 65 percent / retail costs, however, Vietnam has just reached 46 percent. The price elasticity ideas can be utilized in this case in an effort to deter people form smoking.
Tobacco products are kind of goods with inelastic demand since there is certainly amost no swap goods for the coffee lover. Therefore, it is hard to lessen the amount of men and women smoking once they have been addicted. In addition, cigarettes also have a higher income elasticity of demand as people with high income will be prepared to buy far more of packes of smoking, thus, they are more and more addicted.
One way to reduce youth smoking in particular and folks smoking generally is to raise the purchase price through higher cigarette smoking taxes. The lowering amount of youth smoking depends upon the purchase price elasticity of demand. This elasticity is flexible for young adults than for adults. It is because teenager income is relatively low, the portion spent on tobacco usually bigger than that of adult smokers. In addition, peer pressure influences a person's decision to smoking more than an adult's decision to continue smoking. The impact of a higher price also reduces smoking by peers and thus, drives down the number of young smokers. Additionally, young smokers not yet addicted to nicotine are usually more hypersensitive to price rises than parents, who will tend to be heavy smokers. The experience from other countries promotes the efficiency of higher cigarette fees in reducing people smoking. For instance, Thailand authorities has regularly increased the cigarettes fees nine times within 15 years (1992 - 2007) and recently, the amount of tax accumulated is 2-3 times more than Vietnam and the number of smokers is two-thirds less than Vietnam.
Hence, Vietnam need to base on those determinants involving the price elasticies which create effects on demanding for cigarettes to use in imposing appropriate taxes on that product in the earliest time. Actually, a WHO research indicates that if Vietnam boosts about 20 percent the cigarettes taxes, then your retail costs increase ten percent. Thus, the government income will increase 1, 500 - 2000 billion VND and steer clear of 100, 000 fatalities by smoking anually.
CONCLUSION
Being in a position to grasp different kinds of elasticity idea is vital since it helps businesses to help make the best decision in a wide range of activities. Return to the problem setup at the beginning, the answer can be seen to depends upon the price elasticity of demand for the nice. If the demand is flexible, the ratio change in amount is bigger than the percentage change in cost, so a sale increases total income. But if the demand for those shoes is inelastic, the percentage change in price is bigger than the percentage change in amount, so a deal would reduce total revenue. Understanding that will be able the shop to consider if it's appropriate and smart to do a deal to gain the best benefit. Hence, elasticity measurements can help companies or businesses to understand whether what they are doing would bring positive results or not. That is significant, just as economics, resources are scarce, it is reckless to utilize them if the final objectives will not be achieved. In addtion, through the research study of detering people smoking above, it can be seen that the ideas of price elasticities are also useful in inspecting price conditions of an harmful good involving the demand for this in order to take the right actions to solve one of social problems.
