What is Constant Elasticity Demand?
Constant elasticity demand (CED) is a concept used in economics to describe the relationship between the price of a good or service and the quantity demanded by consumers. CED is based on the idea that the change in the quantity demanded is proportional to the change in the price of a good or service. This means that when the price of a good or service increases, the quantity demanded decreases, and vice versa.
Understanding Constant Elasticity Demand
To understand CED, it is important to understand the concept of elasticity. Elasticity is a measure of how sensitive the quantity demanded is to changes in price. A good or service that has a large elasticity is said to be elastic, meaning that the quantity demanded changes significantly in response to changes in price. Conversely, a good or service that has a small elasticity is said to be inelastic, meaning that the quantity demanded does not change much in response to changes in price. CED is a type of elasticity that is constant over a range of prices. In other words, the quantity demanded changes by a consistent amount in response to a change in price. For example, if the price of a good or service increases by 10%, the quantity demanded may decrease by 5%. This relationship is known as constant elasticity demand.
Examples of Constant Elasticity Demand
There are many examples of CED in the real world. One example is the demand for luxury goods. Luxury goods are typically considered to be inelastic, meaning that the quantity demanded does not change much in response to changes in price. This is because consumers of luxury goods are often willing to pay a premium for the goods regardless of price. Another example of CED is the demand for essential goods, such as food and medicine. Essential goods tend to be elastic, meaning that the quantity demanded changes significantly in response to changes in price. This is because consumers of essential goods are often sensitive to changes in price and will adjust their purchases accordingly.
Conclusion
Constant elasticity demand is a concept used in economics to describe the relationship between the price of a good or service and the quantity demanded by consumers. CED is based on the idea that the change in the quantity demanded is proportional to the change in the price of a good or service. Examples of CED include the demand for luxury goods and essential goods.