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A fundamental characteristic of demand is the followings: all else being constant, as price falls, the corresponding quatity demanded rises. Alternatively, as price increases, the corresponding quantity demanded falls. In simple words, there’s a negative or inverse relationship between price and quantity demanded. Economics have labeled this inverse relationship the law of demand. Hence as the cigarette‘s tax raise, due to the tax, the price of cigarettes also had to raise, and according to the law of demand, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa. But in this example of cigarette, this good is an inelastic product because it’s known to be addicted because of its nicotine, the supply curve in the diagram would be more steep, even though the price goes up, the consumer of purchasing would just have a small decrease. The law of demand says that consumers will respond to a price decline by buying more of a product. But the degree of responsiveness of the quantity demanded by consumers to price change may vary considerably from product to product and between different price ranges for the same product. Economists measure how responsive or sensitive consumers’ demand quantity is to a change in the price of product by the own-price elasticity of demand. In general, this is referred to simply as the elasticity of demand. In simple words it means the measure of how responsive consumers’ demand quantity is to a change in the price of a product. And If demand is elastic, a decline in price will result in an increase in total revenue, and if It’s inelastic, a price decline will lower total revenue. Since demand for cigarette is inelastic E<1, since the cigarette has nicotine, it’s addictive to human being, I assume smoker will smoke less, but not by much. And If producers’ supply quantity is responsive to price…
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Rečnik franšizinga i biznisa: Cenovna elastičnost Cenovna elastičnost tražnje je mera procentne promene tražene količine koja rezultira od promene cene. Primer, cenovna elastičnost tražnje od 0,5 daje nam informaciju da se s povećanjem cene od 1% tražena količina na tržištu smanjuje za 0,5%. Tražnja je elastična ako je procentna promena tražene količine veća od procentnog povećanja cene; tražnja je jedinično elastična ako je procentna promena istovetna i kod cene i kod potražnje; tražnja je neelastična ako je procentna promena tražene količine manja od procentnog povećanja cene. Cenovna elastičnost ponude je mera procentne promene u količini kojom se snabdeva tržište, a koja rezultira iz promene cene proizvoda. Deo promena u količini snabdevenosti robom i zbog promene vlastite cene može ležati u pomeranju resursa u njegovu proizvodnju od preduzeća i industrija koje se uključuju u snabdevanje proizvodima koji su blisko povezani sa proizvodom.