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Microeconomics Price Elasticity Of Demand

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Question:

Discuss about the Microeconomics Price Elasticity of Demand.
 
 

Answer:

Demand and supply analysis in microeconomics is considered as an important approach in analysing the equilibrium in the market conditions. All the products are subjected to the market demand and supply analysis, where both the aspects are based upon the price of the product, other factors remaining constant. Demand is negatively associated with the price of the product, whereas, supply is positively associated. It is quite vital for coming to a point where the quantity demanded and the quantity supplied is equal at fixed price (Rader, 2014). This situation is termed as the point of equilibrium, whereas the corresponding price is the equilibrium price and the quantity is equilibrium quantity. In all these topics, one topic in microeconomics is of crucial importance, this is known as the concept of elasticity. Elasticity measures the effectiveness of the change in either quantity demanded or supplied with the change in its price (Nicholson & Snyder, 2014).

This essay deal with the aspect of price elasticity of demand, where the effectiveness of the change in quantity demanded is measured corresponding to the change in the price of the product. In order to do so, two real life examples has been taken into consideration. Two articles, one who deals with the rise in the quantity demanded for internet music producing companies, whereas, the other deals with the effect of electronic vehicles on the price of oil. Both the real life examples has been very well explained with the help of economic concepts and theories. Thereby providing a clear view of how the market in an economy works.

Article 1

According to the news article published by pr newswire in 9th march, 2017, there has been a considerable rise in the revenue generated by companies who have been generating internet music programming market. According  to the article, there has been an increase in the revenue being generated from internet music programming companies due to a sharp rise in the demand among the music lovers. There is a shift of the music listeners consumption patter with an outstanding assembly of cross channel broadcasters and pure play internet programmers, services and platforms. They are all combines with the exploitation of the audio avail plus consumer comfort with affordable payment scheme of paying as per the usage subscription fees. This has resulted into a 57% rise in the revenue of such companies in the year 2016. With the rise in the advertisements and promotional activities generated by such firms, it could be stated that a further increase in the revenue over an amount of $5.4million has been seen in the year 2016. It has been able to capture a large part of the market place with the rise in the muscular 2016 surge. various catalysts has been associated with the increase in the usage of internet music which would result in the synchronizing audios and improved audio avail targeting innovations that has been generated to formulate the program (Newswire, 2017).

Music to be attained from internet music market is considered as a normal good in today’s world. It is consider as a product  which would generate high demand with a slight change in the price pattern. Price elasticity of demand for the products could be stated as the one which has the possibility of generating high demand with a slight change in price (Acemoglu, Laibson & List, 2017). Hence, it could be efficient enough to generate high revenue from the provided production in the market. This shows that the price elasticity of demand for internet music generating companies is greater than one. Such a scenario could be explained with the help of figure 1.

           

Figure 1: Elasticity of Demand for Houses

(Source: As Created By the Author)

In figure 1 the demand curve facing the internet music producers on internet has been drawn the demand curve is relatively elastic in nature with elasticity more than one. This could e quite valuable in  stating hat a slight change in the price of the product, results in a higher magnitude change in the quantity demanded. Hence a flatter demand curve has been seen. As the music retrieved from the internet is considered as a luxury product, a slight fall in the price of the product from p1 to p2, there is a sharp rise in the quantity demanded of the product from q1to q2. The magnitude of the rise in quantity demanded is much more than that of change in price. Hence, it could be easily stated that demand of the product is dependent upon the type of product tat has been taken into consideration.

Article 2

According to the news article published in 6th march, 2017 by EvWorld, it could be stated that the  consideration of electronic vehicles as a hamper for the oil industry is a myth. Research works conducted earlier has stated that by the year 2024,   electronic vehicles would supposedly reduce the demand for oil by 2.2 million barrels per day globally. However, the achievement o such a trend is not feasible in nature. According to the iea’s oil medium term market report in the year 2016, stated that there has been an expected increase in the demand for oil until 2020 by 1.2 million barrels per day and the estimation could have been extended up to the year 2024. If all the increases are added from the year 2015 to 2024, there has been 11 million barrels per day, which has been offset by 2.2 million barrels per day reduction. This has been a result of the electronic vehicles and a net increase in the demand of 8.8 million barrels per day ("Electric Bicycle EXPO", 2017).  

 


The introduction of electronic vehicles in the world had been deemed with a reduction in the demand for oil. Hence, a substitute in the form of electronic vehicles has been introduced in the economy. Yet, the resultant the effect on the demand for oil globally has not been as per expectations. The elasticity of demand for a particular product depends upon the change in their price. The elasticity of demand for a particular product measured the effectiveness of the change in the quantity demanded with respect to the change in its price (Rios, McConnell & Brue, 2013). The elasticity of a product is dependent upon the type of product that is being considered. Oil is considered as a necessity, which is considered as less elastic in nature. The elasticity of such products is considered as less than one. The price elasticity of oil can be explained with the help of figure 2.

           

Figure 2: Elasticity Of Demand For Houses

(Source: As Created By The Author)

According to figure 2, the demand curve for oil has been shown which is steeper in nature. Products that are relatively less elastic face such a steep demand curve, and hence, their elasticity is less than one. In such an effect, it could be seen that even when there has been an introduction of electronic cars globally, the consumption value of oil has not changed largely. It could be stated that with the fall in the price of oil from p1 to p2, the rise in the quantity demanded for oil has been from q1 to q2. The magnitude of the change in quantity demanded is lesser than the magnitude of the change in price. Hence, it could  be easily stated that the price elasticity if demand for oil is relatively inelastic n nature, as oil is considered as a necessary product for the consumers.

Price elasticity of demand is a crucial topic in the field of microeconomics in order to analyse the change in the behavioural pattern of the consumers with respect to the type of product. According to the law of demand, quantity demanded of a product decreases with an increase in price and increases with a decrease in price. Elasticity of demand helps in analysing the effectiveness of the change in quantity demanded with respect to change in price. It measures the magnitude of the change in quantity with the change in demand of the product Both the articles has been taken into consideration in order to frame the effect of elasticity of demand on real world examples. This helps in acknowledging the behaviour of the consumer depending upon the type of the goods. Whether the goods is considered as more elastic or less elastic in nature is completely dependent upon the consumers perspective. Real world example is considered to be more precise in analysing the elasticity of demand.

 

Reference

Acemoglu, D., Laibson, D., & List, J. (2017). Microeconomics. Pearson.

Electric Bicycle EXPO. (2017). Evworld.com. Retrieved 4 April 2017, from https://evworld.com/blogs.cfm?blogid=1408

Newswire, P. (2017). Research and Markets - $4.6 Billion Internet Music Programmers Market 2016-2018 Featuring Amazon, Apple, DoubleClick, Google, Microsoft, Pandora, Pure-play, SiriusXM, Spotify & Viacom. Ca.finance.yahoo.com. Retrieved 4 April 2017, from https://ca.finance.yahoo.com/news/research-markets-4-6-billion-133000119.html

Nicholson, W., & Snyder, C. (2014). Intermediate microeconomics and its application. Nelson Education.

Rader, T. (2014). Theory of microeconomics. Academic Press.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.

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