Law of demand refers to the situation whereby price and quantity of good and services demanded are inversely related while other factors remain constant. This law explains why consumer behavior change when the price of a particular commodity changes. In a market situation, increasing the price of commodities would lead to a decrease in demand for those commodities. On the other hand, the reduction in prices of products would result to increase in demand (Marcin et al. 53). Naturally, the change in prices lead to consumers’ behavior where consumers always have a fear of running out of cash especially when they are buying commodities sold at a higher price. Marcin et al. (53) adds that the consumers intend to go for products that are sold at relatively low prices.
Law of supply refers to a situation whereby the price and quantity of good and services are directly related while other factors that affect the supply of commodity remain constants. For instance, when the prices of a particular good in the market increase, suppliers tend to bring more of that good. Contrariwise, when the prices that consumers pay reduce the suppliers tend to supply less or no more. Furthermore, the law leads to supplies behavior when the prices of goods and services change.
Price elasticity of demand measures the receptiveness if demand for a good or a service as a result of the change in prices. Price elasticity of demand may be calculated by dividing the percentage change in the demand of a product by the percentage change in the price of the same product. Because of the changes in quantity and price of a particular product, for instance, a car, are inversely related to the price elasticity if demand obtained at the end, is always the minus. Price elasticity of demand is important because it enables the business person or company managers to evaluate the effect of prices of a given product in relations to its demand. The information obtained from calculation of price elasticity of demand is usually useful as it allows the business person or the manager to prepare a marketing plan. Price elasticity of demand is also essential because firms can use it to foresee the consequences of an increase or a decrease in prices of goods on finance and performance of the firm (Reinhard et al. 155).
The business or the firms can improve their performances by understanding the price elasticity of demand values which means the owners can be able to predict the future the business. For instance, if the price elasticity value is given by zero, it means that when prices change the demand does not change (Arthur & Ronald 136). When the PED value is 1, then the percentage in price is same as that of change in commodity demanded. If it is higher than one, then demand for the commodity is responding positively and more that change in price. However, price elastic may be affected by factors such as the number of close substitutes in the market which imply that consumers may decide to change the choices due to a relative change in prices. It is therefore significant for a business to consider the prices of the close substitutes. The business should also consider the period between the changes in prices of a product. Business managers can use this factor to assess consumers’ response to price changes. Given business revenue, the business can use price elasticity of demand to predict the total revenues based on the increase or decrease in prices. According to Edwin & William (106), business organizations should ensure that the price elasticity is inelastic and raise their prices to yield higher revenues.
Works Cited
Arthur, Snow & Ronald, Warren. Pigou’s Law and the proportionality of income and price elasticity’s of demand. Economic Letters, Vol. 132, 2015, Pp. 136-138.
Edwin, Franks, & William, Bryant. The Uncompensated Law of Demand: A ‘Revealed, Preference’ approach. Economics Letter, Vol. 152, 2017, pp.105-111.
Marcin, Makowski, Edward, Piotrowski, Jan, Sładkowski, & Jacek, Syska. ‘Profit intensity and cases of non-compliance with the law of demand/supply’. Statistical Mechanics and its applications, Vol. 473, 1 May 2017, Pp. 53-59.
Reinhard, Hössinger, Christoph, Link, Axel, Sonntag, & Juliane, Stark. Estimating the price elasticity of fuel demand with stated preferences derived from a situational approach. Transportation Research Part A: Policy and Practice, Vol. 103, 2017, Pp. 154-171.