Elasticity of Demand

Elasticity of demand, also known as price elasticity refers to the way people react to price changes. The greater the demand elasticity, the more sensitive people are to changes in pricing. The degree of demand of a product or service depends on its pricing. If the product is priced lower, it will experience high demand while a higher priced product may see lower demand. Generally, products such as cars, appliances, cosmetics and other non-essential items show elasticity of demand while food, medicine, clothing and other necessities display inelasticity of demand.

Our survey consist various types of green teas which are Dilmah, Lipton and Ten Ren. All three products that we surveyed contained the same amount of tea bags which is 20 tea bags. Dilmah was priced at RM8. 00 which comes up to RM0. 40 cents a bag and Ten Ren was priced at RM8. 79 which comes up to RM0. 44 cents a bag while Lipton was priced at RM18. 40 making it RM0. 92 cents per bag. From this information itself, we can say that Dilmah and Ten Ren are similarly priced while Lipton is priced considerably high compared to Dilmah or Ten Ren.

According to the concept of price elasticity of demand, a 10% rise in price will result in a more than 10% drop in quantity demanded if a product shows elasticity of demand. If a product show inelasticity of demand, a 10% rise in price will result in a less than 10% drop in quantity demanded. At the price range of RM8. 00 to RM8. 79, we assume that Dilmah and Ten Ren are products that show inelasticity of demand while Lipton priced much higher at RM18. 40 shows elasticity of demand.

We argue that this is due to the nature of the good where Dilmah and Ten Ren are considered necessities while Lipton is considered a luxury because they are aim towards different markets. Dilmah, Ten Ren and Lipton are supposed to be similarly priced because all three brands are Green Tea and carry two bags each but the higher pricing of Lipton suggests otherwise. Substitutes are supposed to be similar in pricing. Therefore this justifies that Lipton is a luxury good and aimed for a higher market. A lot of close substitutes exists at similar pricing for Ten Ren and Dilmah such as BOH and Cameron who also offer Green Tea.

At this market, when one product experiences a change in price, a substitute of the product will either experience an increase or decrease in quantity demanded depending on the nature of the price change. Therefore due to the availability of many close substitutes, demand is more elastic for Ten Ren and Dilmah. However for Lipton which is aimed at a different market, the existence of close substitutes are almost none. Hence, Lipton would show an inelasticity of demand. When the income of consumer increases, the share of budget increases.

Therefore, consumers have the ability to choose more. Luxurious product can be also purchased depend on the consumers budget, then the quantity increase as well. Since, Lipton is luxury good, when our consumer’s income increase, they will choose Lipton instead of Dilamh and Ten Ren. Moreover, when the income of consumer decreases, share of budget also decreases. Therefore, they will not choose luxury product, they will choose more necessity product such as Dilmah and Ten Ren. http://www. ehow. com/info_12132333_advantages-elasticity-demand. tml http://www. investopedia. com/terms/c/complement. asp http://www. businessdictionary. com/definition/elasticity-of-demand. html Complements are very important these days. Complement is a product that is used in together with another product. There are no fixed complements for green tea (Ten Ren, Dilmah, Lipton). However, some consumers use complements such as sugar or honey to go with their green tea. In this situation, a decrease in the price of sugar or honey might lead to an increase of quantity demanded of green tea. ( Ten Ren, Dilmah, Lipton).