Principles of Economics
Demand is basically the quantity of goods and services that a consumer will be willing to buy at a certain price over a given period of time. Effective demand occurs when one demands of needs something and also has the purchasing power to actually afford it. Quantity is a collective term but the level of “quantity demanded” is referred to for a certain price level. Demand is by nature a flow variable because we measure it as so many units of quantity demanded over a certain period of time.
The demand is the overall market demanded calculated by the summation of all the demands of individual firms operating in the market. Whereas, the quantity demanded is an individual figure for a particular price set in the market for that good or service. Model of supply and demand to explain why ticket scalpers exist The factor that influences demand the foremost along with others is naturally the price level; this leads to the law of demand. The higher the price, the lower the demand; this is because higher prices reduces the purchasing power of a buyer by reducing the income level.
Therefore, the lower the price, the higher the quantity demanded. Supply is the quantity of those goods that sellers and producers are eager and capable of selling at a certain price over a particular period of time. Again, apart from many other factors, price affects supply the most; leading to the law of supply. The higher the price, the more the producers are willing to sell their product; this is because the higher the price, the more their cost of production is being covered by the revenue generated. Likewise, lower the price, the lower the quantity supplied (Sloman & Sutcliffe, 2003).
So, when there is a demand for tickets but they are short in supply, according to the law, the shortage causes a rise in prices. Ticket scalpers make use of this situation and sell the tickets at a higher price than what they paid for it because there is a high demand for it in the market, and since those tickets are not available anywhere else and are short in supply, the customers will be willing to pay a higher price for it than usual. Demand Elasticity Elasticity is defined as the extent to which quantity responds to a change in a variable that affects it, such as prices or income.
There are three kinds of elasticities – price elasticity of demand, income elasticity and price elasticity of supply. Price elasticity of demand measures the responsiveness of quantity demanded to price fluctuations, (ceteris paribus) keeping all other things constant. Normally, the responsiveness of quantity demanded and change in price is measured in percentages. This is naturally in collaboration with the demand curve; thus the flatter the demand curve, the more elastic the demand is; that is, the percentage change in quantity demanded is greater compared to the percentage change in price.
When there are many substitutes available for a good in the market and customers have choice; the definition of the product is narrow and specific; time period is long enough for more substitutes to come up, and not short term; the type of good is not a necessity and is a luxury item; the proportion of income spent on it is high; and the number of uses of a good is low; the product is said to be ‘price elastic’. These are the conditions that are required for a price elastic good.
Therefore, based on the above criteria: opera is a luxury so it is highly demand elastic; foreign travel is again a luxury so it is highly demand elastic; local telephone services are a necessity to quite an extent but can be replaced with mobile phones with cheap packages so it is moderately price elastic; video rentals can again be replaced by internet free downloads so moderately price elastic; and eggs are a complete necessity and cannot be substituted altogether, so they are price inelastic. Campus Film Series Campus films with a rating of 1. 40 are price elastic.
Normally, total revenue equals multiplication of price into the quantity demanded of that product. Since, the companies know that if they are selling products with price elasticity, if they raise prices, the quantity change will be very evident and thus their sales will fall. However, if the price falls, the responsiveness of the quantity demanded will be greater and the demand will rise. This takes place based on the very basic law of demand; the higher the prices, the lower the quantity demanded – this law is in action due to the purchasing power concept; the greater the price, the lower the purchasing power of the income the consumer has.
Therefore, a smart businessman who sells price elastic goods will lower his prices so that his quantity demanded rises – the reduction in revenues through this trick is much lesser than the reduction in the quantity demanded due to an increment in price. Therefore, the prices of the campus film series should decreased for the maximization of profits. References Sloman, J. , Sutcliffe, M. , (2003), Economics, Published by Prentice Hall/Financial Times, ISBN 0273655744Sample Essay of Paperial.com