Primarily, price elasticity is defined as the responsiveness of quantity demanded of a commodity to its increase in price. In this measure, all things must be constant; thus, only prices should change. Some goods are price inelastic, indicating that their value varies indirectly proportional to changes in demand and supply. Majorly, price elasticity is used to understand the concepts of supply and demand alterations in the real world.
There are various determinants of price elasticity of demand. First, the availability of substitutes is a determinant since the greater the level of substitution, the higher the level of price elasticity for the product (Dikgang, Leiman & Visser, 2012). Second, the proportion of consumer expenditure indicates that the larger the spending on a particular good, the higher its price elasticity. Third, the longer the time spent to buy a product, the more price elastic it is (Dikgang, Leiman & Visser, 2012). Importantly, when the price of one complementary good increases, the demand for the other good rises. Additionally, the higher the number of uses of a product, the greater its price elasticity.
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Bottled water has an elastic demand since people have numerous substitutes such as tap water. Gourmet coffee is elastic since if its prices increase, consumers purchase alternatives such as tea. Apple cell phones are inelastic due to their uniqueness despite the presence of substitutes. Gasoline is an elastic good since it is highly sensitive to changes in income and price.
A luxury good is a commodity that is not essential; however, it is highly desired and may be associated with affluent individuals. In contrast, a necessity commodity is a product or service that people purchase regardless of the alterations in their incomes, and thus, they are less sensitive to revenue changes.
When demand is price inelastic, a reduction in prices causes a decline in total revenue. It is because the increased percentage of quantity demanded is significantly less than that of a price decrease. Price elasticity is critical to firms. It helps companies to charge prices depending on the changes in the value of their substitutes.
Reference
Dikgang, J., Leiman, A., & Visser, M. (2012). The elasticity of demand, price and time: lessons from South Africa's plastic-bag levy. Applied Economics, 44(26), 3339-3342. https://doi.org/10.1080/00036846.2011.572859
