How do you know if a price is elastic or inelastic?
Answer:
A price is elastic (i.e price elasticity is greater than 1) when people are responsive to changes to this price for example if the price increases a significant number of people will stop buying that product whereas if the price decreases a significant number of people will start buying the product. On the other hand the price of the product is inelastic (i.e. price elasticity is smaller than 1)when people arent responsive to changes to this price for example whether you increase or decrease your price there is little difference to the extent your consumers demand.
In order to deem whether a good is elastic or inelastic it is always good to know the determinants of price elasticity of demand which are:
a)The number and availability of substitutes.
b)The time horizon.
c)The percentage of income spent on the good.
d)The type of good.
e)The width of definition.
Elastic prices are prices that can go up and down from month to month or year to year. Examples of elastic costs would be electric bills, commission, etc.
Inelastic prices are prices that do not change. Examples of inelastic costs are rent and salaries.
use this formula ; /€/= change in quantity/ change in price
if /€/ <1, it means the good is inelastic
(doesnt matter -0,2 or 0,2 they re both inelastic)
if /€/ > 1, it means the good is inelastic
(doesnt matter if it is 20 or - 20 both elastic)
the changing in inelastic goods prices dont affect so much the demand of these goods... as they re generally basic goods, people buy this goods eventhough how the prices are high
(for example diabetics must use insulin, water...etc)
the changing in elastic goods prices affect demand of these goods seriosly, these goods are generally luxuries, so they are not a need, (jewelery,cars, yatchs...etc)
whopps im sorry i told about elastic and inelastic goods in order to prices... but may be this can help you too
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