. what effect does elasticity have on the change in price levels?
Consider Table 5 and Figure 2 below, which illustrate this effect: at. lower price levels, demand is price-inelastic, while at higher price. levels, this effect reverses completely. The source of this change in. the price elasticity of demand along a linear demand curve is due to. A change in price does not always lead to the same proportionate change in demand. For example, a small change in price of AC may affect its demand to a considerable extent/whereas, large change in price of salt may not affect its demand. So, elasticity of demand is different for different goods.Various factors which affect the elasticity of demand of a commodity are: Many factors can affect the stability of the price elasticity esti-. mates—different price points (location on the demand curve), time. horizon (short run versus long run), the method of measuring de-. mand, and availability of close substitutes. Each is discussed in turn. below. Elasticity of demand for any commodity is generally less for higher income level groups in comparison to people with low incomes. It happens because rich people are not influenced much by changes in the price of goods. But, poor people are highly affected by increase or decrease in the price of goods. Demand for a commodity with large number of substitutes will be more elastic. The reason is that even a small rise in its prices will induce the buyers to go for its substitutes. For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-versa. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. There are two types of price elasticity: price elasticity of supply and price elasticity of demand. The price elasticity of supply measures the responsiveness to the supply of a good or service after a change in its market price. According to basic economic theory, the supply of a good increases when its price rises. Conversely, the supply of a good decreases when its price decreases. Price elasticity of supply measures the percentage change in supply divided by the percentage change in price. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. Price Point Impact. Even with a linear demand curve, price elasticity for any product. (including tobacco) varies as the price for that product varies. De-. mand tends to be relatively inelastic at lower price levels (due to. smaller income effects), but grows more elastic as price increases. When the price elasticity of demand for a good is relatively inelastic (-1 < Ed < 0), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue increases, and vice versa.
The price for that product changes