Thursday, December 15, 2011

Mechanism of Elasticities: Price Elasticity of Demand



"Price Elasticity of demand (PED) is the responsive of the quantity of a good or service demanded given a change in price. Price elasticity of demand is affected by the number of close substitutes for a good, the degree of necessity, trend, seasonal changes, and time. The greater the degree of the factors the more elastic the good or service will be, visa versa.

If a good or service is price elastic, an increase in price would cause a significant fall in quantity demanded for the specific good/service.

Conversely, if a good or service is price inelastic, an increase in price would cause a change in demand that will be proportionately smaller than the percentage change in price" (Microeconomics - Price Elasticity of Demand).

In effect, alternative renewable resources will cause the demand of fossil fuel to be more elastic because the number of substitutes to fossil fuels affects the demand for fossil fuels. In theory, this would increase the competition between renewable energy companies and fossil fuel companies.

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