Increase in population in the economy increases the demand for the property. Price elasticity of demand is the receptiveness of demand to a slight change in prices of the property. Price elasticity is calculated by dividing change in the quantity demanded by change in price of the property. For example, if the price of property increases from £1 to £1.2, and the daily sales falls from 600000 to 400000, the PED will be: PED= change in quantity/change in price (400000-600000)/ (1200-1000) =-100* 1/600000 =- 0.000167 The negative sign in the price elasticity of demand shows the relationship between demand and its price.
Price elasticity of demand can take four forms depending on their values. PED that is less than one is inelastic demand. Inelastic demand for goods means that an increase in price by a greater amount reduces quantity by relatively smaller size. Properties, which are inelastic, are suitable for a country that wants to increase tax because a tax increase means an increase in the price. Increase in the prices will not affect the quantity demanded of the commodity in the housing market. PED of more than one means that the commodity is more sensitive to price and is referred to as elastic good.
Increase of a price by small proportion decrease the quantity demanded by large amount. When the commodity is elastic, the investor should not increase the price because the consumers can shift to the readily available substitutes. Perfectly inelastic, a commodity has a PED of zero, which means there is no change with an increase in price of the commodity. Perfectly elastic, commodities has PED of infinity because an increase in price by a smaller amount reduces the quantity demanded over 100%.
Unitary means that the rise in price reduces the price by the same proportion of the rise in price. The following diagram explains the elasticity of demand at different points and their relationship to the firms’ revenues. Price elastic of demand has relationships with the revenue function of the firm. The firms use the is projected relationship between PED and revenue to make strategic decisions. The firm maximum total revenue is projected at point where PED IS 1, total revenue is at the maximum point and the marginal revenue is zero (economicsonline. co. uk).
Price elasticity of demand is an important pricing tool since the investors raise or lower price basing on the figures of the PED. The price elasticity of demand in the housing market is influenced by several factors in the economy.
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