Price Elasticity of demand

Price Elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change its price. (Investopedia, 2013) 

There are different types of price elasticity of demand one of the elasticity is Elastic Demand. Demand is elastic if a specific percentage change in price results in a larger percentage change in quantity demanded. Demand is inelastic if a specific percentage change in price produces a smaller percentage change in quantity demanded. (Mcconnell, Brue and Flynn, 2013, p.113) Unit elastic demand is defined as given in percentage change in price, there will be an equal percentage change in quantity demanded. Goods and products such as, candy, carbonated drinks, branded handbags are elastic because when the price of these goods fall or decrease, the quantity demanded will rise. On the other hand, necessities like rice, water, fruits are inelastic because we use it in our daily life.

Example, petrol is inelastic in Malaysia because nowadays the amount of car usage is increasing and quantity demanded increase. Eventhough, the price increases, the quantity demanded will decrease but not that much because petrol has become a necessity and hence the consumers are not sensitive to the changes in prize.

 Not only prices affect quantity demanded. There are few determinants of price elasticity of demand, such as Substitutability. Generally, the larger the number of substitute goods that are available, the greater the price elasticity of demand. (Mcconnell, Brue and Flynn, 2013, p.117) If you have a car, there are no alternatives to buying petrol. This is why the increased price of petrol has failed to reduce the demand for petrol.

Do you think petrol will become an elastic demand when hybrid electric vehicles are fully in used?

In my opinion, petrol will not become an elastic demand. Hybrid electric vehicles might not launch the same amount as the amount of petrol car launched due to insufficient resources of producing hybrid cars. Futhermore, cost of making a hybrid car is much costly and expensive compared to petrol car, and there are some low income groups that unable to afford hybrid car. On the other hand, hybrid electric vehicles will be an elastic demand because when the price of hybrid electric vehicles fall, the quantity demanded for it will rise. 

List of reference

1. Mccconnell, C. Brue, S. and Flynn, S. (2013) Economics. New York: McGraw-Hill
2. Investopedia (2013) Price Elasticity of Demand. Available at:

http://www.investopedia.com/terms/p/priceelasticity.asp (Accessed 9 July 2013)

Written by : Loh Skyll (0315386)
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