Price Elasticity of Demand & Monopoly Market Structure Questions

Running Head: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 1
PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS
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: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 2
Price Elasticity of Demand & Monopoly Market Structure Questions
Question 1
In its basic definition, Price elasticity of demand is an approach used to measure the
elasticity or responsiveness of the quantity of goods or services demanded when there is a
change in price but other factors held constant. More precisely, it is defined as the percentage
change in the quantity of goods or services demanded when the price changes by a rate of one
percent. Expect for the goods which don’t conform to the law of demand like Giffen goods and
Veblen goods which have a positive price elasticity of demand, all other products always have a
negative price elasticity of demand (Jawad, Lee, Glantz & Millett, 2018). From the notion of
price elasticity of demand, inelastic or relatively inelastic goods are realized. Goods are said to
be inelastic if the PED is less than one. This is to imply that changes price have minimum effects
on the quantity of products demanded. On the other hand, when the price elasticity of demand is
greater than one, then the demand for a certain good is said to be elastic.
Arithmetically, Price elasticity of demand is taken as the relative change in the dependent
variables (quantities demanded) to the relative change in the independent variables (product
Prices) (Labandeira, Labeaga & López-Otero, 2017). Representing this definition arithmetically,
a simple formula to measure the price elasticity of demand is obtained. Using ‘e’ to represent
elasticity, then:

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 3
Also, because elasticity is the percentage change in the quantity of goods demanded
divided by the percentage change in price, incorporating the percentage factor in the equation we
realize the equation:
In a case where the percentages are known, the elasticity can be calculated. Because the
coefficient of elasticity demand is a pure number i.e. its independent of measurement units, it can
easily be calculated or determined from the formula below:
Q is the quantity of goods demanded; P is the price, ΔQ/Q is the relative change in
quantity demanded while ΔP/P is the relative change in the product price. A negative sign (-) is
inserted in the formula before the fraction in order to make the coefficient of elasticity negative.
There are a number of factors which determine the price elasticity of demand for different
products. The common determinants include availability of close substitutes, necessities, time
and habits. Basically, if there is greater availability of product substitutes, then the product is
more elastic (Colchero, Salgado, Unar-Munguía, Hernandez-Avila & Rivera-Dommarco, 2015).
This is to imply that if the price of a product slightly goes up, consumers can easily turn to other
brands. On the other hand, if a product or service is a necessity, then the demand is inelastic.
That implies that an increase in the price of these types of products doesn’t have a huge impact
on the quantities demanded. In regard to the time factor, It draws from the fact that goods tend to
become inelastic where consumers have more time to find substitutes or alternatives. A good
example under this category is the price of gasoline. Over time, if the price goes up, people

: PRICE ELASTICITY OF DEMAND & MONOPOLY MARKET STRUCTURE QUESTIONS 4
adjust to this change by driving less, using public transport or forming carpools. Finally, the
consumption habits of a product also play an important role when determining the price elasticity
of demand. The demand for addictive products is inelastic because consumers have no choice but
to pay for the products.
Product 1: Cigarettes
“Article: Chelwa, G., & van Walbeek, C. (2019). Does cigarette demand respond to price
increases in Uganda? Price elasticity estimates using the Uganda National Panel Survey and
Deaton’s method. BMJ Open, 9(3), e026150.”
According to the research by Chelwa & Walbeek (2019) which was based on Uganda’s
cigarette consumption, the price elasticity of demand for this product was estimated to be 0.66.
Based on this estimate (0.66), it was clear that even when the price for cigarettes goes up, the
impacts on demand was very small.
Cigarette smoking lies in the category of habitual products. Cigarette smoking is
addictive in nature and hence very few smokers can withstand the urge for smoking despite the
circumstances. This is to imply that cigarette smokers can do anything to ensure that they acquire
cigarettes, including approaches like forgoing meals and other basic needs.
Based on the price elasticity of demand estimate above (0.66), cigarettes are under the
category of inelastic products.