Demand and price elasticity of demand Essay Example | Topics and Well Written Essays - 1500 words

Demand and price elasticity of demand - Essay Example In the case of Bordeaux, the consumers had proposed a low wine price. This implies that reducing the price of the wine will make the commodity be more affordable to the consumers (Sheffrin, B. 2003). This would increase the demand of the product thus increasing its supply. Increase in the supply of Bordeaux wine would increase the number of sales. Price elasticity of a commodities demand involves a measure that is used in economies in showing the elasticity responsiveness of the quantity of the product that is demanded towards a change in the product’s price. In this respect, it provides the percentage change of the quantity of the product that is demanded to follow a response to a change in the price. Price elasticity can be considered to be negative despite the fact that analysis would always ignore the negative sign leading to ambiguity (Peters, K. 2006). A positive price elasticity of demand occurs in a case where the products do not satisfy the law of demand. In this resp ect, the demand of the wine would be said to be inelastic when the price elasticity of demand (PED) is below one. This implies that the price changes have a significantly smaller effect on the amount of wine that is demanded. On the other hand, the demand of Bordeaux wine would be said to be elastic whenever the price elasticity of is more than one. This means that the changes in the commodities price would greatly influence the amount of the wine that is demanded. In the case of Bordeaux wine, the demand of the product could be said to be elastic. This is so because the demand of this wine is strongly affected by changes in price. Therefore, increasing the price of the product would reduce the demand of the product where as reducing the price of the product would have an effect of increasing demand of the product (Knugman, R. 2005). It is for this reason that the merchants who were contacted through The Times argue that they could only accept the wine when the price of the wine is reduced to about ?95 in 2008 for the best brands compared with the ?318 in 2007 vintage (Sage, A. & Pavia, W. 2009). These investors argue out that when the price of wine is higher than the proposed one, there would be no customers. This is a clear indication that the demand of Bordeaux wine was elastic. Part B. The amount of the wine demanded is normally a strong component of its price. A case study done to find out the quantity of the wine demanded at various price levels with all the other factors kept constant, would result into the table 1. Table 1. Demand schedule. year price Average price quantity 2002 95 95 170 133 700 2003 192 192 253 223 500 2004 141 145 190 159 600 2005 472 480 622 523 300 2006 450 450 622 536 200 2007 318 318 466 392 400 Graph 1. The graph represents the quantity of the wine that is demanded as the variable that is Independent (x-axis) and the price as the variable that is dependent (y-axis). According to the law of demand the quantity of the product tha t is demanded will always move towards the opposite price direction. This is observed in the graph above through the downward demand curve slope. When one moves along the curve, a change in the price of the wine would result into a change in the quantity that is demanded. Whenever there exists a change in the influencing factor besides price there could be a shift in the demand curve either towards the right or the left,