Elastic demand for price is typical for. Elasticity of supply and demand (5)

12.04.202227.05.2017

2.1.4. Elasticity of supply and demand

The reaction of buyers and sellers to changing market conditions, in particular, to price changes, can be of different intensity. To characterize the degree of influence of price changes on the behavior of buyers and sellers in the economy, the concept is used elasticity- the degree of response of one quantity to a change in another. This concept is important from a practical point of view. You need to know how the decrease in the cost of goods will affect their sales volumes and revenue. Elasticity is assessed using elasticity coefficient, which is defined as the ratio of the percentage change in one value to the practical change in another in absolute and relative terms.

E d \u003d ∆Q / Q: ∆ P / P \u003d (Q 2 -Q 1) / Q 1: (P 2 -P 1) / P 1:%

Types of elasticity of demand:

1. Price elasticity of demand. The dependence of changes in demand for goods on changes

its price is called price elasticity of demand ( price elasticity of demand ).

It is customary to distinguish 3 options for price elasticity:

Elastic demand, when with a slight decrease in price, the volume of goods increases significantly (E D > 1);

Single singularity of demand, when the change in price, expressed in%, is equal to the percentage change in sales volume (E D =1);

Inelastic demand, if a change in price does not lead to a significant change in sales (E D<1);

Elastic demand for price happens for luxury goods and expensive commodities. Inelastic demand for essential goods with low prices.

The graph shows that the larger the elasticity coefficient, the flatter the demand curve.

And the smaller it is, the steeper the curve falls.

Extreme cases of elasticity of demand

In the case of perfectly elastic demand - this is a horizontal demand curve - consumers pay the same price for a product, regardless of the amount of demand (E \u003d ∞). In the case of absolutely inelastic demand, they buy the same amount of goods at any price level (E = 0) - a vertical straight line.

The price elasticity of demand affects the amount of revenue and the financial condition of the seller. Revenue is P × Q, or the area of a rectangle with one side equal to the price of the good and the other equal to the quantity of the good sold at that price. With elastic demand, a decrease in price causes an increase in the volume of goods, which leads to an increase in total revenue (the area of the rectangle corresponding to the low price is clearly larger than the area of the rectangle corresponding to the high price).

With inelastic demand, a decrease in price leads to such a small increase in sales that the amount of total revenue, ∞, decreases (the area of the rectangle corresponding to the low price is less than the area of the rectangle corresponding to the high price).

Price elasticity of demand depends on the following factors:

1) indispensability- if the product has substitutes, then demand will be more elastic;

2) significance goods for the consumer - inelastic is the demand for essential goods, more elastic - for all other groups;

3) share in income and expenses - goods that occupy a significant share of the consumer budget are elastic and vice versa - inelastic;

4) time frame - elasticity of demand increases in the long run and becomes less elastic in the short run.

The income elasticity of demand is the ratio of the percentage change in the volume of demand for a product to the percentage change in income (I):

E D \u003d ∆Q / Q: ∆I / I \u003d (Q 2 -Q 1) / Q 1: (I 2 -I 1) / I 1

If the consumer increases the volume of purchases with increasing income, then the income elasticity is positive (E T > 0) - standard (normal) goods.

If demand growth outpaces income growth (E T >1), then this is a high income elasticity of demand.

If the value is negative (E T<0), то речь идет о низкокачественных товарах, т.е. тех товарах, когда потребители при растущем доходе покупают эти товары меньше, заменяя их более качественными.

Supply elasticity

The sensitivity of quantity supplied to a change in the market price measures the elasticity of supply, which is defined as the degree to which the quantity of goods offered for sale changes in response to a change in the market price.

The supply elasticity coefficient is calculated as the ratio of the percentage change in the quantity of products offered to the percentage change in price.

E S =∆Q/Q: ∆P/P

The graph shows options for three main cases:

1) S 3 - elastic supply (E S > 1);

2) S 1 - inelastic supply (E S< 1);

3) S 2 - offer with unit elasticity (E=1).

Extreme values of supply elasticity:

S 2 - absolutely elastic (E S = ∞);

S 1 is a perfectly inelastic supply (E S =0).

The time factor is important for elasticity, i.e. the period during which producers have the opportunity to adjust the volume of supply to a change in price.

There are 3 time intervals:

1) the shortest a market period that is so short that producers do not have time to respond to changes in demand and prices; the supply volume is fixed;

2) short term - production capacities remain unchanged, but their intensity (raw materials, labor force) may change;

3) long term- sufficient to change production capacities, organize new proposals, i.e. when all factors become variables.

Price, income elasticity of demand, and cross price elasticity of 2 goods.

Price elasticity of demand

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

The presence of competing products or substitute products (the more there are, the greater the opportunity to find a replacement for a product that has risen in price, that is, the higher the elasticity);
Changes in the price level imperceptible to the buyer;
Conservatism of buyers in tastes;
Time factor (the more time a consumer has to choose a product and think about it, the higher the elasticity);
The share of the goods in the consumer's expenses (the greater the share of the price of the goods in the consumer's expenses, the higher the elasticity).

The elasticity of demand is affected by shelf life and production characteristics. Perfect elasticity of demand is characteristic of goods in a perfect market, where no one can influence its price, therefore, it remains unchanged. For the vast majority of goods, the relationship between price and demand is inverse, that is, the coefficient is negative. The minus is usually omitted and the evaluation is done modulo. However, there are cases where the elasticity of demand turns out to be positive - for example, this is typical for Giffen goods.

Products with price elastic demand:

Luxury items (jewelry, delicacies)
Goods, the cost of which is tangible for the family budget (furniture, household appliances)
Easily replaceable goods (meat, fruits)

Goods with price inelastic demand:

Essentials (medicines, shoes, electricity)
Goods whose cost is insignificant for the family budget (pencils, toothbrushes)
Hard-to-replace goods (bread, light bulbs, gasoline)

Point elasticity of demand with respect to price

The point price elasticity of demand is calculated using the following formula:

Where the upper index means that this is the elasticity of demand, and the lower index indicates that this is the price elasticity of demand (from the English words Demand - demand and Price - price). That is, price elasticity of demand measures the degree to which demand changes in response to a change in the price of a good.

Depending on these indicators, there are:

Perfectly inelastic demand		the quantity demanded does not change when the price changes (essential goods).
Inelastic demand		when the volume of demand changes by a smaller percentage than the price (consumer goods, the product has no replacement).
Unit elasticity of demand		a change in price causes an absolutely proportional change in the quantity demanded.
elastic demand		the volume of demand changes by a greater percentage than the price (goods that do not play an important role for the consumer, goods that have a substitute).
Perfectly elastic demand		the quantity demanded is unlimited when the price falls below a certain level.

Arc price elasticity of demand

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:

where and are the average values of the corresponding quantities.
That is, when the price changes from to and the volume of demand from to , the average price value will be , and the average demand value

Income elasticity of demand shows the percentage change in demand for a 1% change in income. It depends on the following factors:

The importance of goods for the family budget.
Whether the product is a luxury item or an essential item.
Conservatism in tastes.

By measuring the income elasticity of demand, one can determine whether a given good is classified as normal or of low value. The bulk of the consumed goods belong to the category of normal. As incomes rise, 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:

where the upper index means that this is the elasticity of demand, and the lower index indicates that this is the income elasticity of demand (from the English words Demand - demand and Income - income). That is, income elasticity of demand measures the degree to which demand changes in response to changes in consumer income. Depending on the properties of goods, the income elasticity of demand for these goods can be different. The classification of goods by value is given in the following table:

Normal (full) good		The quantity demanded increases as the consumer's income increases.
Luxury item		The volume of demand changes by a greater percentage than income.
Essential item		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 (inferior) good		Demand falls as consumer income increases. An example is the pearl barley consumption market.
Neutral boon		There is no direct relationship 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) goods, since the condition contains both conditions, and , and .

Cross elasticity of demand

(cross elasticity of demand)

It is the ratio of the percentage change in demand for one good to the percentage change in the price of some other good. A positive value of the value means that these goods are interchangeable (substitutes), a negative value indicates that they are complementary (complements).

where the upper index means that this is the elasticity of demand, and the lower index indicates that this is the cross elasticity of demand, where under and are meant some two goods. That is, the cross elasticity of demand shows the degree of change in demand for one product () in response to a change in the price of another product (). Depending on the values of the receiving variable, I distinguish the following links between goods and :

Goods substitutes		Consumers can theoretically replace the consumption of good A with the consumption of good B. For example, two brands of washing powder.
Complementary Goods		Consumers theoretically cannot change consumption of good A without changing consumption of good B in the same direction. A good example is laptops and their accessories.
Items that are independent of each other		A change in the price of good B has no effect on the consumption of good A.

Notes

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See what "Elasticity of demand" is in other dictionaries:

- (elasticity of demand) The ratio between the proportional change in the required quantity and the proportional change in price. The elasticity of demand is calculated based on the assumption that income and prices of all other goods remain unchanged. Usually in… … Economic dictionary

elasticity of demand- An indicator that characterizes how much the demand for a product can change if its price changes by one percent. Elasticity in marketing is not a very loose concept, but has a very specific scope. The behavior of demand is monitored in particular for ... Technical Translator's Handbook

The degree of change in the demand for a good in the market when its price changes by one percent. Dictionary of business terms. Akademik.ru. 2001 ... Glossary of business terms

Elasticity of demand- ELASTICITY OF DEMAND/DEMAND ELASTICITY Degree of response of a change in demand to a change in one of the independent variables that affect demand. A change in the quantity demanded as a result of a change in the price of a good is called the price ... ... Dictionary-reference book on economics

ELASTICITY OF DEMAND- see Elasticity of supply and demand ... Big explanatory sociological dictionary

Elasticity- the degree of response of one variable in response to a change in another associated with the first value.

A quantitative measure of elasticity can be expressed in terms of the coefficient of elasticity.

Elasticity coefficient is a numeric indicator showing the percentage change in one variable as a result of a one percent change in another variable. Elasticity can vary from zero to infinity.

Types of elasticity. There are the following types of elasticity:

price elasticity of demand;
income elasticity of demand;
price elasticity of supply;
cross price elasticity of demand;
point elasticity of demand;
arc elasticity of demand;
elasticity of the ratio of prices and wages;
elasticity of technical substitution;
elasticity of a straight line.

In economic theory, the elasticity of supply and demand is considered.

Price elasticity of demand.

It shows the extent to which the consumer reacts to price changes.

E(p) - price elasticity of demand;
d Qd (%) - percentage change in demand;
d P(%) - percentage change in price.

E>
E< 1 - неэластичный спрос (на предметы первой необходимости);

Elasticity of demand

The division of elasticity into these forms is rather arbitrary, since different goods have different coefficients of elasticity. For example, basic foodstuffs have a low price elasticity of demand. Luxury goods, on the other hand, have a higher price elasticity. Elasticity can change depending on the time factor, on population groups, on the availability of substitute goods.

Income elasticity of demand y.

This is a numerical parameter that shows how the consumer reacts to changes in his income while prices remain unchanged.

,where:
d Y (%) - percentage change in income

The value of income elasticity is closely related to the concept of normal goods and goods of inferior quality. For normal goods, an increase in income causes an increase in demand. Since in this case income and demand change in the same direction, the income elasticity of demand is positive. Conversely, for inferior goods, an increase in income causes a decrease in demand. Income and demand move in opposite directions, so the income elasticity of demand is negative in this case. For certain groups of goods (salt, matches), demand does not increase with an increase in income, elasticity is zero.

3. Cross elasticity.

It characterizes the sensitivity of demand for one product to changes in prices for another.

,where:
E (k) - cross elasticity;
d Q1 (%) - percentage change in demand for one product;
d P2 (%) - percentage change in the price of another product.

Using the coefficient of elasticity, the following types of cross elasticity can be determined:
a) E (k) > 0 for substitute goods;
b) E(k)< 0 для товаров- комплементов;
c) E (k) = 0 for indifferent (independent) goods.

Elasticity of supply takes the following main forms:

elastic supply, when the quantity supplied changes by a greater percentage than the price. This form is characteristic of a long period;
inelastic supply, when the quantity supplied changes by a smaller percentage than the price. This form is characteristic of a short period;
perfectly elastic supply is inherent in the long run. The supply curve is strictly horizontal;
absolutely inelastic supply is typical for the current period. The supply curve is strictly vertical.

Elasticity of the supply of goods (price) is the percentage relationship between a change in price and a change in supply.

One of the determining elements of the elasticity of the supply of any product or service is the mobility of the factors of its production and output, i.e. the ease with which the necessary factors of production can be brought in from other industries. The second important factor is time. As with demand, price elasticity of supply tends to increase over long-term time frames. This is partly due to the mobility of resources, but also depends on the technologies used, the state of the production base, etc. Over time, the adaptation of producers to market conditions improves the market opportunities to match the output of their products to increased demand, which leads to an increase in the elasticity of supply.

The theory of elasticity of supply and demand is of great practical importance. The elasticity of demand is an important factor influencing a firm's pricing policy. Another example of the actual use of elasticity theory is in government tax policy as well as employment policy.

forms of elasticity. Price elasticity of demand takes the following main forms:

E > 1 - elastic demand (for luxury goods);

E< 1 - неэластичный спрос (на предметы первой необходимости);

E = 1 - demand with unit elasticity (depends on individual choice);

E = 0 - perfectly inelastic demand (salt, medicines);

E - perfectly elastic demand (in a perfect market).

The concept of elasticity and inelasticity of demand

Elasticity of demand - a change in demand for a given product under the influence of economic and social factors associated with price changes; demand can be elastic if the percentage change in its volume exceeds the decrease in the price level, and inelastic if the rate of price decrease is greater than the increase in demand.

According to the law of demand, consumers will buy more products when prices fall.

However, the extent to which consumers respond to price changes can vary greatly from product to product.

Economists use the concept of price elasticity to measure the sensitivity of consumers to changes in the price of a product.

If small changes in price lead to large changes in the quantity purchased, then such demand is called relatively elastic or simply elastic.

If a significant change in price leads to a small change in the number of purchases, then such demand is relatively inelastic or simply inelastic.

unit elasticity. Perfectly elastic and inelastic demand

When the percentage change in price and the subsequent change in quantity demanded are equal in magnitude, then this case is called unit elasticity.

If a change in price does not lead to any change in the quantity demanded, then such demand is perfectly inelastic.

If the smallest price reduction induces buyers to increase their purchases from zero to the limit of their ability, then such demand is perfectly elastic.

The degree of price elasticity or inelasticity is determined using the coefficient of elasticity (Ed).

Ed = DQ /DR, where

DQ - percentage change in the number of requested products,

DR - percentage change in price.

Percentage changes are calculated by dividing the change in price by the original price and the subsequent change in quantity demanded by the quantity originally demanded.

Using percentage changes allows you to avoid errors in calculations when using arbitrary units of measurement.

The price elasticity coefficient will always have a negative sign (since the law of demand is an inverse relationship between the quantity of a product and the price), therefore only the absolute value of the elasticity coefficient is considered.

1. Elastic demand (Ed>1). If demand is elastic, a decrease in price will increase total revenue. Because even with a lower price paid per unit, the increase in sales is more than enough to compensate for the losses from the price reduction. The converse is also true: with elastic demand, an increase in price will lead to a decrease in total revenue.

If demand is elastic, a change in price causes total revenue to change in the opposite direction.

2. Inelastic demand (Ed<1). Если спрос неэластичен, уменьшение цены приведет к уменьшению общей выручки. Расширение продаж оказывается недостаточным для компенсации снижения выручки, получаемой с единицы продукции, и в результате общая выручка уменьшается. Обратное утверждение тоже верно,

If demand is inelastic, a decrease in price causes total revenue to change in the same direction.

3. Unit elasticity (Ed=1). Increasing or decreasing the price will leave the total revenue unchanged.

Elasticity is determined on a given interval. Its definition on some other interval may be the same or change depending on the demand formula.

Linear demand curve. The elasticity of the intervals of prices and the quantity of demand is not the same on the entire straight line representing demand. Elasticity changes as you move down the demand curve Course of Economic Theory: Textbook./Ed. A. N. Tur, M. I. Plotnitsky. - Mn.: "Misante" 1998..

Demand curve of constant elasticity. The demand curve can be represented non-linearly. The curve can have such a shape that the elasticity can be constant at any arbitrary interval Course of Economics: Textbook / Ed. B.A. Reisberg. - INFRA-M, 1997. - 720s.

Factors of price elasticity of demand. 1. Replaceable. The more good substitutes for a given product are offered to the consumer, the more elastic the demand for it is. The elasticity of demand for a product depends on how narrowly defined the boundaries of this product are. 2. Share in the consumer's income. The more space a product occupies in the consumer's budget, ceteris paribus, the higher the elasticity of demand for it. 3. Luxury goods and necessities. The demand for necessities is usually inelastic, the demand for luxuries is usually elastic. 4. Time factor. Demand for a product is more elastic than longer decision time. It depends on the habits of the consumer, the durability of the product.

cross elasticity. The concept of cross elasticity measures how sensitive consumer demand for one product (good X) is to changes in the price of some other product (good Y).

This concept allows us to understand the phenomena of interchangeability and complementarity of goods. If the coefficient of cross elasticity of demand is positive, that is, the quantity of product X demanded varies in direct proportion to the change in the price of product Y, then products X and Y are interchangeable goods. The larger the positive coefficient, the greater the degree of substitutability of the two given goods. If the cross elasticity coefficient is negative, then goods X and Y are complementary goods. The larger the negative coefficient, the greater the complementarity of the two given goods. A coefficient of zero or almost zero indicates that the two goods are not related, that is, they are independent goods.

Income elasticity of demand for a product measures the percentage change in the quantity demanded of a product due to a change in the consumer's income.

For most goods, this coefficient will have a positive value (for goods of the highest category). The value of the coefficient will vary significantly from product to product. A negative value of the coefficient of income elasticity of demand indicates a product of the lowest category.

The practical value of income elasticity is to make it easier to predict which industries have a chance to prosper and expand, and which will stagnate and decline in the future. High positive income elasticity means that the contribution of a particular industry to economic growth will be greater than its share in the structure of the economy. A small positive or negative coefficient indicates the prospect of a decline in production in the Modern Economics industry. Public course. Rostov - on - Don, publishing house "Phoenix", 1997 - 608s..

When analyzing supply and demand, it is important to allocate the duration of a period of time. In other words, it is necessary to determine the period of time through which we will determine the changes. With an interval of less than a year - a short-term period. In general, short-term demand and supply curves look completely different than long-term ones.

For many goods, demand is more price elastic for the long term than for the short term. This is because changing consumer habits takes time, and also because the demand for one good can be associated with a slower-changing stock of another good.

For other goods, demand is more elastic in the short run than in the long run. These are durable goods, so the total stock of each good owned by consumers is large compared to the annual volume of their production. As a result, a small change in the total inventory that consumers want to have can lead to a large percentage change in purchases.

The income elasticity of demand is also different for the long run and the short run. For most goods and services, income elasticity of demand is greater in the long run, as people can only afford to increase consumption gradually. For durable goods, the picture is reversed. Even a small increase in income leads to a sharp increase in current purchases. Because demand for durable goods fluctuates very sharply in response to short-term changes in income, the industries that produce these goods are very sensitive to changing macroeconomic conditions. This applies to business activity - recessions and booms. No wonder these industries are called "cyclical" - their sale tends to increase cyclical changes in GNP and national income.

Price elasticity of demand. Measurement of elasticity.

ANSWER

ELASTICITY OF DEMAND FOR PRICE - an assessment of the change in the quantity demanded for a product with a change in price. More precisely, the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.

Price elasticity of demand is a measure of the sensitivity of quantity demanded to a change in the price of a good, assuming all other factors that affect demand remain constant.

The price elasticity of demand for different goods can vary significantly. Demand for basic necessities (food, shoes) is inelastic, since they are necessary for life and, despite the price increase, it is impossible to refuse to consume them. Luxury goods, on the other hand, have a higher price elasticity.

Price elasticity of demand depends on the following factors:

Availability of substitute goods (substitutes). The more substitute products that satisfy a similar human need, the higher the elasticity. Goods that have no substitutes (such as insulin) are inelastic;

Time to adjust to price changes. In the long run, demand is usually more elastic because it is only over time that people are able to find more substitutes. In the short run, demand is very inelastic;

The share of the consumer budget dedicated to the product. A small share of the budget going to the consumption of essential goods, with an increase in prices for them, may not significantly affect their consumption. Such goods include, for example, toilet paper, salt, etc.

ELASTICITY MEASUREMENT. To measure elasticity, you need to determine how much demand changes when the price changes.

The numerical value of the price elasticity of demand can be determined by the following formula:

where Q, D - the volume of demand, measured along the demand curve; P - the price of the goods.

Let's assume that a 1% increase in the price of a new computer (ceteris paribus) will result in a 2% decrease in the number of annual computer sales (compared to the previous year). In this case, the price elasticity of demand will be: 2% / 1% = -2.

The value of price elasticity of demand is expressed as a negative number, because the law of demand assumes that for any change in price, the change in quantity demanded is the opposite. This means that if the denominator is positive, the numerator is negative, and vice versa. The ratio of two percent change indicators is always a negative value, since the numerator and denominator have different signs.

Price elasticity of demand can decrease from zero to minus infinity. The greater the absolute value of price elasticity of demand, the greater the price elasticity of demand. So, demand is more elastic at the value of E D = -5 than at E D = -1, because the number 5 acts as an absolute value for -5 and is greater than 1, i.e., it is greater than the absolute value of -1.

There are several forms of price elasticity of demand:

Elastic demand, if the absolute value of elasticity ranges from 1 to infinity;

Inelastic demand, if the absolute value of elasticity varies from 0 to 1;

Unit elasticity if elasticity is -1 and its absolute value is 1;

Perfectly inelastic demand if the price elasticity of demand is zero;

Perfectly elastic demand is when the absolute value of elasticity is infinity.

These forms of elasticity will be illustrated in Fig. 14.1, 14.2.

On fig. 14.1 shows three demand curves with different elasticity. In all cases, prices are halved, and the magnitude of consumer demand varies in different ways. On fig. 14.1a a two-fold decrease in price causes a triple increase in demand. On fig. 14.16 double lowering the price leads to a double increase in demand. On fig. 14.1v halving the price causes only a 50% increase in demand.

Rice. 14.1. Three forms of price elasticity of demand

Two extreme forms of price elasticity of demand are shown in Fig. 14.2.

Rice. 14.2. Perfectly elastic and perfectly inelastic demand

Perfectly elastic demand means that demand is infinitely elastic and an insignificant change in price causes an infinitely large change in the quantity demanded. This demand is shown in Fig. 14.2 by a horizontal line.

Perfectly inelastic demand is demand that does not change at all with a change in price. This demand is shown in Fig. 14.2 by a vertical line.

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