Price elasticity of demand is a good area in economics that needs to be understood in order to understand the changes that happen on our markets. It also ensures that good decisions are made.
Price elasticity of demand refers to the “…responsiveness of changes in the quantity of goods and services demanded in relation to the changes in their prices” (Schumpeter & Elizabeth, 1994, p.44). According of Perloff (2008), “The four factors, which influence the price elasticity of demand, include the availability of substitutes, specific nature of the goods available on the market, part of income spent on the goods and the time when the consumers buy particular goods and services” (p.21).
Last month I purchased a pair of leather shoes from a shoe-shop in town, which I believe that the demand of the shoe played a key role in setting up of the price.
The four factors aforementioned may have contributed to the price elasticity of demand of the pair of leather shoe I bought. For instance, the availability of substitutes played a key role in the pricing of the shoes.
The kind of the shoe I bought was a new design that was new in the market, durable and of its own kind. Demand of the shoes was high leading to increase in price. Although other shoes substitutes were available in the markets, the new shoe design was more appealing compared to other types of shoes hence increasing its elasticity.
Nature of the shoes was unique. They were durable and comfortable, which made its elasticity high. As a result, many people or consumers preferred the shoes irrespective of the price changes due to its advantages compared to its disadvantages. Therefore, its nature also led to the increase in demand elasticity hence increase in its price.
Because of the great desire and need to purchase the shoes, the price was a bit high because of the high demand; hence, I spent a considerable amount of my income in purchasing the shoes. The demand did not change to a higher magnitude regardless of the fact that the prices had increased significantly.
Time is also a crucial consideration when it comes to price elasticity in relation to demand of a product (Schumpeter & Elizabeth, 1994, p.34). During the month when I bought the shoes, the rate of economic growth was high and the income of the people was slightly high.
This therefore necessitated spending, hence leading to a hike in prices. Therefore, the time of purchasing the shoes also played a key role in increasing the prices of the shoes. At that time, the shoes were in high demand due to the changes in weather; those shoes were the best option in dealing with such climate.
Hence, the time the consumers’ buy certain products should be of concern in order to weigh the right prices of certain commodity. Therefore, the shoes I bought at that time can be considered as inelastic. This follows in the sense that changes in price had a relatively slight effect or impact on the demand of the shoes. The consumers will buy the shoes irrespective of the changes in prices.
In duration of a month, various aspects have changed and therefore, the current supply has reduced since the current demand reduced drastically. The reduction in demand is attributed to changes in weather, introduction of new designs going at relatively cheaper price than the design I bought, changes in income among other reasons have lead to these shifts. People will always want to buy new fashions and therefore, in the last one month various changes has been seen which shifted the earlier status.
References
Perloff, J. (2008). Microeconomic Theory & Applications with Calculus. New York: Pearson Press.
Schumpeter, J., & Elizabeth, B. (1994). History of economic analysis. London: Routledge.