Demand elasticity

Elastic demand

Inelastic Demand

The elasticity of demand allows you to almost accurately measure the degree of customer reaction to changes in prices , income levels or other factors. It is calculated through the coefficient of elasticity . Shows the ratio of the change in the value of the function Y per unit of relative change in argument X. Independent variables: 1) the price of a given product 2) the price of all other goods 3) income.

Content

Types of Elasticity

Distinguish between price elasticity of demand, income elasticity of demand, and cross elasticity at the price of 2 products.

Price Demand Elasticity

The price elasticity of demand shows how much percent the demand will change when the price changes by 1%. The price elasticity of demand is influenced by the following factors:

The presence of competitor goods or substitute products (the more they are, the greater the opportunity to find a replacement for a more expensive product, that is, higher elasticity);
A noticeable change in the price level for the buyer (sharp and noticeable changes in prices lead to an increase in the elasticity of demand for goods);
Modernity and awareness of buyers about the market of goods of interest (the more the buyer understands one or another sphere of goods of interest, the higher the elasticity);
Time factor (the more time a consumer has for choosing a product and thinking over - the higher the elasticity);
The proportion of goods in consumer spending (the greater the share of the price of goods in consumer spending, the higher the elasticity).

The elasticity of demand is affected by shelf life and production features. Perfect elasticity of demand is characteristic of goods in a perfect market, where no one can affect its price, therefore, it remains unchanged. For the vast majority of goods, the relationship between price and demand is the opposite, that is, the coefficient is negative. The minus is usually taken to be omitted and the assessment is made modulo. Nevertheless, there are cases when the coefficient of elasticity of demand is positive - for example, this is typical for Giffen goods . It is also important that the price rises or falls: the elasticity may vary.

Products with elastic demand at a price:

Luxury goods: jewelry, delicacies
Goods whose value is tangible for the family budget: furniture, household appliances
Easily replaced goods: meat, fruits

Products with inelastic demand for price:

Essentials: medicines, shoes, electricity and other energy sources
Items that are not worth much for the family budget: pencils, toothbrushes
Hard-to-replace goods: bread, light bulbs, gasoline, drugs

Point price elasticity of demand

The point price elasticity of demand is calculated using the following formula:
$E_{P}^{D}={\frac {\Delta Q/Q}{\Delta P/P}},$ ${\ displaystyle E_ {P} ^ {D} = {\ frac {\ Delta Q / Q} {\ Delta P / P}},}$
where is the superscript $D$ ${\ displaystyle D}$ means that this is elasticity of demand, and the subscript $p$ ${\ displaystyle p}$ says that this is the elasticity of demand by price (from the English. D emand - demand and P rice - price; Q uantity - quantity, value of <sales>). That is, price elasticity of demand shows the degree of change in demand in response to a change in the price of a product. The value usually turns out to be negative, because, as follows from the law of demand , with increasing prices, demand for goods decreases.

Depending on these indicators, they distinguish:

Absolutely Inelastic Demand	$E_{P}^{D}=0$ ${\ displaystyle E_ {P} ^ {D} = 0}$	demand does not change when prices change: essential goods
Inelastic Demand	$-1<E_{P}^{D}<0$ ${\ displaystyle -1 <E_ {P} ^ {D} <0}$	demand changes less than price: everyday or non-replacement goods
Unit demand elasticity	$E_{P}^{D}=-1$ ${\ displaystyle E_ {P} ^ {D} = - 1}$	demand changes in proportion to price (in opposite directions)
Elastic demand	$-\infty <E_{P}^{D}<-1$ ${\ displaystyle - \ infty <E_ {P} ^ {D} <- 1}$	demand changes more than price: goods have a replacement or do not play an important role for the consumer
Perfectly elastic demand	$E_{P}^{D}=-\infty$ ${\ displaystyle E_ {P} ^ {D} = - \ infty}$	demand changes by a finite value with an infinitely small change in price: demand is very dependent even on minor price fluctuations

Arc demand price elasticity

In cases where the change in price and / or demand is significant (more than 5%), it is customary to calculate the arc elasticity of demand :
$E_{P}^{D}={\frac {\Delta Q/{\overline {Q}}}{\Delta P/{\overline {P}}}},$ ${\ displaystyle E_ {P} ^ {D} = {\ frac {\ Delta Q / {\ overline {Q}}} {\ Delta P / {\ overline {P}}}},}$
Where ${\overline {Q}}$ ${\ displaystyle {\ overline {Q}}}$ and ${\overline {P}}$ ${\ displaystyle {\ overline {P}}}$ - average values of the corresponding quantities.
That is, when the price changes from $P_{1}$ ${\ displaystyle P_ {1}}$ before $P_{2}$ ${\ displaystyle P_ {2}}$ and volume of demand with $Q_{1}$ ${\ displaystyle Q_ {1}}$ before $Q_{2}$ ${\ displaystyle Q_ {2}}$ , the average price will be ${\overline {P}}={\tfrac {P_{1}+P_{2}}{2}}$ ${\ displaystyle {\ overline {P}} = {\ tfrac {P_ {1} + P_ {2}} {2}}}$ , and the average value of demand ${\overline {Q}}={\tfrac {Q_{1}+Q_{2}}{2}}$ ${\ displaystyle {\ overline {Q}} = {\ tfrac {Q_ {1} + Q_ {2}} {2}}}$

Income elasticity of demand

The income elasticity of demand shows how many percent the demand will change when income changes by 1%. It depends on the following factors:

The importance of the product for the family budget.
Whether the item is a luxury item or a daily necessity.
Conservatism in tastes.

By measuring income elasticity of demand, it can be determined whether a given product is classified as normal or low value. The bulk of the consumed goods is classified as normal. With the growth of income, we buy more clothes, shoes, high-quality food, durable goods. There are goods for which demand is inversely proportional to consumer income. These include: all second-hand products and some types of food (cheap sausage, seasoning). Mathematically, income elasticity of demand can be expressed as follows:
$E_{I}^{D}={\frac {\Delta Q/Q}{\Delta I/I}},$ ${\ displaystyle E_ {I} ^ {D} = {\ frac {\ Delta Q / Q} {\ Delta I / I}},}$
where is the superscript $D$ ${\ displaystyle D}$ means that this is elasticity of demand, and the subscript $I$ ${\ displaystyle I}$ says that this is the elasticity of demand by income (from the English words Demand - demand and Income - income). That is, income elasticity of demand shows the degree of change in demand in response to changes in consumer income. Depending on the properties of goods, the elasticity of demand for these goods by income may be different. Classification of goods by values $E$ ${\ displaystyle E}$ given in the following table:

Normal (full) benefit	$E_{I}^{D}>0$ ${\ displaystyle E_ {I} ^ {D}> 0}$	The volume of demand increases with increasing consumer income.
Luxury item	$E_{I}^{D}>1$ ${\ displaystyle E_ {I} ^ {D}> 1}$	The volume of demand changes by a larger percentage than income.
Essential goods	$0<E_{I}^{D}<1$ ${\ displaystyle 0 <E_ {I} ^ {D} <1}$	The volume of demand changes by a smaller percentage than income. That is, with an increase in income by a certain number of times, the demand for a given product will increase by a smaller number of times.
Inferior (lower) good	$E_{I}^{D}<0$ ${\ displaystyle E_ {I} ^ {D} <0}$	The volume of demand decreases with increasing consumer income. An example is the barley market.
Neutral good	$E_{I}^{D}=0$ ${\ displaystyle E_ {I} ^ {D} = 0}$	There is no direct correlation between the consumption of this good and the change in income.

Separately, it should be noted that both luxury goods and essential goods are normal (full-fledged) benefits, since the condition $E_{I}^{D}>0$ ${\ displaystyle E_ {I} ^ {D}> 0}$ contains both conditions, and $E_{I}^{D}>1$ ${\ displaystyle E_ {I} ^ {D}> 1}$ , and $0<E_{I}^{D}<1$ ${\ displaystyle 0 <E_ {I} ^ {D} <1}$ .

Cross Demand Elasticity

This is the ratio of the percentage change in demand for one product to the percentage change in the price of any other product. A positive value means that these products are interchangeable ( substitutes ); a negative value indicates that they are complementary ( complements ) ^[1] :

E_{XY}^{D}={\frac {\Delta Q_{X}/Q_{X}}{\Delta P_{Y}/P_{Y}}},

{\ displaystyle E_ {XY} ^ {D} = {\ frac {\ Delta Q_ {X} / Q_ {X}} {\ Delta P_ {Y} / P_ {Y}}},}

where is the superscript $D$ ${\ displaystyle D}$ means that this is elasticity of demand, and the subscript $X Y$ ${\ displaystyle XY}$ suggests that this is the cross elasticity of demand, where under $X$ ${\ displaystyle X}$ and $Y$ ${\ displaystyle Y}$ any two goods are meant. That is, the cross elasticity of demand shows the degree of change in demand for one product ( $X$ ${\ displaystyle X}$ ) in response to a change in the price of another product ( $Y$ ${\ displaystyle Y}$ )

Depending on the values taken by the variable $E$ ${\ displaystyle E}$ distinguish the following connections between the goods $X$ ${\ displaystyle X}$ and $Y$ ${\ displaystyle Y}$ :

Goods substitutes	$E_{XY}^{D}>0$ ${\ displaystyle E_ {XY} ^ {D}> 0}$	Consumers can theoretically replace the consumption of goods $X$ ${\ displaystyle X}$ for consumption of goods $Y$ ${\ displaystyle Y}$ . For example, two brands of washing powder.
Complementary goods	$E_{XY}^{D}<0$ ${\ displaystyle E_ {XY} ^ {D} <0}$	Consumers theoretically can not change the consumption of goods $X$ ${\ displaystyle X}$ without change in the same direction of consumption of goods $Y$ ${\ displaystyle Y}$ . A good example is laptops and their accessories.
Independent Products	$E_{XY}^{D}=0$ ${\ displaystyle E_ {XY} ^ {D} = 0}$	Change in product price $Y$ ${\ displaystyle Y}$ does not affect the consumption of goods $X$ ${\ displaystyle X}$ .

Notes

↑ McConnell K.R., Bru S.L. Economics: Principles, problems and politics. In 2 t. T. 2 . - M .: Republic, 1992. - S. 26-27. - 400 p. - ISBN 5-250-01486-0 .

[:1-1] McConnell K.R., Bru S.L. Economics: Principles, problems and politics. In 2 t. T. 2 . - M .: Republic, 1992. - S. 26-27. - 400 p. - ISBN 5-250-01486-0 .