Price Elasticity and Its Importance in Business

This report provides detailed information on price elasticity (PE) and its importance in business. It explains the concepts of Price Elasticity of Demand (PED) and Price Elasticity of Supply (PES), and how they affect consumer behavior and market forces. The report also discusses the role of government in relation to PE and the significance of economic data in the business environment.

PRICE ELASTICITY AND
ITS IMPORTANCE IN
BUSINESS

Executive Summary
The present report is on Price elasticity (PE) and its importance in business, which shows
the two ways of working of PE like PED and PES. The reports give precise formula to calculate
both PED and PES so that market forces can be measure with the help of PE. It also explains the
role of Govt. in economic in relation to PE and how this concept is important in business.

INTRODUCTION
The reports give detailed information of price elasticity and its importance in business
economics, in the business, Price elasticity (PE) can be plumbed of how relative market place is
fluctuated in unit of a specific product. The PE concept works in two different manner one is
relation to demand and other is relation to supply. Price elasticity of demand represents alteration
in consumer behaviour due to change in price of product. PE of supply measures the supplier's
behaviour in relation to change in price of product. Economists use this concept to realize how
demand or supply alteration price change in real economy. It also gives emphasis of Govt. role
and significance of business economic data of PE in businesses.
MAIN BODY
Price Elasticity OF Demand (PED)
If quantity supply of ware results in large alteration in effect to price alteration then it is
referred as 'elastic' means the quantity can be increased from its previous point. And if any
product which purchased from the small sops then it also leads to change in the price which is
known as inelastic (Labandeira, Labeaga and López-Otero, 2017). Therefore, it can be stated that
it is vice versa of elastic term. In order to calculate the same, formula is designed which is as
mention below:
Price Elasticity of demand (PED) = % change in Quantity demanded / % change in price of
product
The degree of response of measure supply to alteration in cost can differ. The key
standard for measurement is whether the coefficient is less or greater than proportionate. PED
can be less than 1 which means its inelastic, if its more than 1 means its elastic, zero means its
perfectly inelastic and infinite (∞) means it's perfectly elasticity.

Government Role in Price Elasticity Of Demand:
PE is considered one of the important thing in order to formulate government policies and
practices specially the policies of taxation policy. The Govt. can enforce high levy on products
with inelastic of supply whereas low rates of taxation produces of product with elastic demand.
In a mixed economy like UK Production mainly depends on market forces. So government helps
such countries to decide decision regarding price fixation according to market forces (Oladosu
and et.al, 2018.). The concept is also used to decide the distribution factors like if there is any
change in demand then the elasticity of the product is also affected and this in turn affect the
success of a product as well. Such cases the government play important role in deciding wages
for labour as trade union play important role in contributing development of economy.
Government also imposes some rule for international trade which also affect the price elasticity
and forces of market.
Significance of economic data with business environment
The relation between terms and ingestion of product is measure by PE. Many economists
have attempted to conduct research on price elasticity of demand of alcohol. The bulk number of
people says that alcohol follows the legal document of supply but its comparatively price dead.
Rise in price of alcohol decreases the consumption according to the law of demand but fall in
proportion is littler than addition in price (How does the price of alcohol affect consumption?
2017). For the same, two meta analysis is also attempted in order to consolidate the research. The

impact of change in taxation or price on consumption is that 0.46% decease in beer consumption,
0.69% decrease in the wine consumption & 0.80% decline in consumption of spirits. They have
also observed that the high drinkers respond less to the price change. Its how's that 1% price
change results in 0.28% decrease in drinking group. From the analysis it is found that the
demand for spirits and wine is more elastic as compared to demand of beer. It was also found
from the data that 0.36% decline in consumption of beer, 0.70% decrease in consumption of
wine is 0.68% fall in the spirit consumption and 0.50% fall in the overall consumption of
alcohol.
Economists studied the relation between age & price and evaluated that young people
reduce drinking habits to low in response to price changes. Supporting this argument the
economist has also said that hike in income is higher and related with drinking levels, 1%
increase in income results in 0.39% growth in consumption of beer,1.10% growth in the wine,1%
increase in spirits consumption and 0.50% increase in overall consumption of alcohol. Both these
studies aggregate this data from range of the different cultures, countries, and economist.
The UK Govt. provides its own estimate for the price sensitivity to the model the effects
of taxation change, This varies from the change in prices on off trade & on trade, and to find the
beer and the cider consumption is more price elastic in off trade, but spirits and wine
consumption is highly elastic in the on trade. The government uses this to decide this concept to
determine the price elasticity of these drinks. Impact of the change in prices of product impacts
the consumption of another product. The UK Govt. Estimates the price elasticity of different
alcoholic drinks are shown below:

Using another modelling approach, It can be analysed that the consensus which raises prices of
the alcohol can decrease the consumption. Also there is an agreement which shows demand is
highly elastic in the off trade for cider and beers and in on trade it is for spirits and wine. And
there is disagreement over particular drinks is more price elastic.
Potential Issues with the concept of PED
There are various economic and political issues that may affect the decision regarding
price elasticity of demand. It is really important to understand that PED calculation is just
estimated figure that may change due to change in market forces with time to time. Customers
due to political and economic factors and issues can become more sensitive to price change. Due
to easily availability of market information customers become more aware about price deciding
policies or determinants of price. So the management and government try to minimize such
issues that can harm interest of any consumer.
Price Elasticity OF Supply (PES)
Law of the supply states there is a direct relation between quantity supplied and the price of
product. Market of different commodities, differ in working ways (Morlotti and et.al, 2017). The
concept of supply deals all this differentiation of market with ease. Price elasticity of the supply
is the ratio of % change in the price to % change in quantity supplied of the commodity.
Price Elasticity of Supply (PES) = % change in quantity supplied % change in the prices.

If supply is elasticity, producers could increase in production of the products without delay of
any cost & time and if supply of products is inelastic then the firm find it hard to the change in
production within given period of time.
 Product as well as several services of business have perfectively inflexible in case we
required amount of product can be supplied at any price might be. The PE of economic
process for those product is nil. Its line is symmetric to to opposite of X axis. It shows
how irrespective of price required supply of products or service remains the same.
 When happening in supply is little than occurrence in value of trade good, it can be stated
that products have comparatively to a lesser extent ES in so much cases the supply of
elasticity is assumed to be less than value 1.
 When relation in amount indefinite quantity is greater than alteration in cost, so is said to
exist relatively greater supply where the value is more than 1.
 In Unitary elastic supply change in abstraction provided of goods is exactly equal to
modification in price of that good. The elasticity of supply in such case is equal to 1.
 A perfectly supply of elsticity has an infinite elasticity. A perfectly Elasticity of supply
curve is straight line collateral against to Y axis.
PES is affected by numerous element such as first-string among change the time period value
occurrent, accessibility of secondary by the others player, the institution susceptibility for
enhanced manufacture complexity.

Importance of price elasticity of supply in business environment
The UK market is taken by supply of inelastic, Contempt ascending demand, supply
conflict to keep up. It is difficult of getting land in UK to build houses as supply of land in UK is
less so getting permission to make build house become difficult. Therefore, inelastic supply of
UK housing leads to higher prices than many other countries that have demand elastic (The
importance of elasticity of supply. 2020).
The graph shows the present increase in price of houses in UK, which is partly due to inelastic
supply. There are various other factors also available that leads change in supply of products or
services but the price is important factor that influence supplier to change the market forces as
ultimate goal of supplier is to sell any product at high prices so that they can earn amximum
profit.
CONCLUSION
From the report it can be concluded that price affects the market forces. The reports gives
information regarding how PED works and affects the consumers' behaviour what are different
types of PED and how they are related with quantity demanded. It also gives emphasis on
government role in price elasticity of demand like deciding taxation policies according to

elasticity and inelasticity of products. For explaining significance of PED in business
environment the report gives the detail regarding alcohol consumption behaviour of UK people
in relation with change in price. elasticity of supply shows state in relation quantity indefinite
quantity and price of product. There is also details regarding types of PES and role of Govt. in
PES and its importance in Business environment.

REFERENCES
Books And Journals
Online
How does the price of alcohol affect consumption? 2017. [Online] Available through:
<http://www.ias.org.uk/Alcohol-knowledge-centre/Price/Factsheets/How-does-the-
price-of-alcohol-affect-consumption.aspx>
The importance of elasticity of supply. 2020. [Online] Available through:
<https://www.economicshelp.org/blog/154526/economics/the-importance-of-elasticity-of-
supply/>