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Price Elasticity
Types of Elasticity and behavior in the
long term and short term and effect of
Government Policies and Market
Failures
Name
[Pick the date]

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1.1 Price Elasticity of Demand:

Price elasticity of demand can be defined as the sensitivity in the decrease of quantity
demanded with a change in the price of the product. (Klein & Bauman, 2010) For example, if
the price increase by 10% and the quantity demanded falls by 30%, we can deduce that the
demand is quite sensitive to the price. However, suppose with the same increase in price, if
the quantity demanded falls by just 5%, we can assume that the demand is not sensitive to the
price. Moreover, if the price increases by 10% and quantity demand too falls by 10%, we can
assume that the demand Is equally sensitive to the price. This sensitivity to the price with
relation to the demand is known as price elasticity. In scenario 1, we say that the demand is
elastic, in scenario 2 the demand is inelastic and in scenario 3 the demand is unit elastic.
Let us consider an example:
Price

Demand

Elastic

Unit
Elastic

Inelast
ic

100

500

500

500

110

416.66
67

454.5454
55

476.19
05

121

347.22
22

413.2231
4

453.51
47

133.1

289.35
19

375.6574

431.91
88

146.4
1

241.12
65

341.5067
28

411.35
12

600
500
400
300
200
100
0

Elastic
Unit Elastic
Inelastic

Now, Total Revenue is the total income generated by selling the products (or)
services. (Klein & Bauman, 2010)
Mathematically, it be represented as TR = P X Q (TR is Total Revenue; P is the price
and Q is the total quantity demanded or sold at the price). (Klein & Bauman, 2010)
Price
$
100
110
121
133.1
146.4
1

Demand
Elasti
c

Unit
Elastic

Inelas
tic

500
416.6
667
347.2
222
289.3
519
241.1
265

500
454.545
455
413.223
14
375.657
4
341.506
728

500
476.1
905
453.5
147
431.9
188
411.3
512

TOTAL REVENUE
Unit
Elasti
Inelas
Elasti
c
tic
c
50000 50000 50000
45833
52380
50000
.33
.95
42013
54875
50000
.89
.28
38512
57488
50000
.73
.39
35303
60225
50000
.34
.93

In the above case, TR decreases in case of elastic goods, remains the same in the case
of unit elastic goods and increases in the case of inelastic goods.
Hence, from the above example, we can infer that a company producing elastic goods
will see a drop in total revenue with a price hike and hence have no incentive for increasing

prices. However, a company producing inelastic goods will see a steady increase in Total
Revenue and hence have an incentive to increase the price, even though total demand is
falling. In the case of unit elastic goods, the company Total Revenues remain unchanged,
hence they have no major incentive to increase or decrease the price.

2. Price Elasticity of Demand in the Short Run and Long Run:

It is generally believed that the demand for a product will remain more inelastic in the
short run. (Pettinger, 2008). This is because people are used to the consumption of a certain
product and switching from the product may take some time. (Pettinger, 2008). Let us
consider the example of Medicines. People who are prescribed medication, especially life
saving drugs will have to buy them even at increased rates. The quantity demanded may fall,
but it is assumed that the fall in demand will be less sensitive than the increase in the price..
This is because they will have to wait to find a similar compound of the prescribed
medication to them at a cheaper rate. The same compound may or may not be immediately
available, and, hence, it would take time for the switch to happen.
In converse, the demand will be highly elastic in the longer run as consumers will
have more time to adjust their buying patterns and search for substitute or similar goods in
the market.
3. Impacts of government and market imperfections (failures) on the price elasticity of
demand and supply?
Government policies and market imperfections or failures can sometime wreak havoc
in the economy. If the government has a policy to protect its domestic producers from
foreign players, it may impose several restrictions on market entry of these foreign

companies. (Economics Online, 2009) It would result in reducing competition in the

economy which would result in only the domestic players producing a certain product. This
would lead to demand being relatively inelastic, even in the long run, as the consumers would
have no choice but to purchase from the domestic producers, which may be quite a few.
Similarly, the use of subsidies may result in prices being kept artificially low which
would mean a higher quantum of demand. (Economics Online, 2009) On the other hand, if
the Government decides to impose taxes on certain products. (Economics Online, 2009) For
example Sin Tax on Alcohol and Cigarettes, the demand for these products will
simultaneously fall, making the goods extremely elastic.
The Government may also take some initiative and fix prices of certain products or
even resources such as labour. (Economics Online, 2009)They might impose a price ceiling
or minimum wage policy. (Economics Online, 2009)
This would again result in artificial prices and have an elastic impact on the demand
for goods.
References:
Economics Online. (2009). Government failure. Retrieved from Economics Online:
http://www.economicsonline.co.uk/Market_failures/Government_failure.htm
l
Klein & Bauman. (2010). Stand-Up Economics: Stand-Up Economics with
Calculas. Stand-Up Economics.
Pettinger, T. (2008, April 18). Price Elasticity of Demand Short and Long Run.
Retrieved from Economics Help:
http://www.economicshelp.org/blog/435/concepts/price-elasticity-ofdemand-short-and-long-run/