Supply and demand have the ability to adapt to changing market conditions, called elasticity.Today, almost no one section of the economy can not do without this concept: the theory of the firm, the analysis of supply and demand, economic cycles, economic expectations, ERI, etc.
sensitivity of the market to these and other factors, market conditions characterized by a special coefficient of elasticity of demand.The meaning of this indicator is the following: how to quantify the amount of change in demand when the market factor changes by 1%.
Depending on the unit, the ability to respond to one of the economic variables to changes in the other is illustrated by various methods.Therefore, to unify the selection method used percentage measurement.
coefficient of elasticity of demand is calculated on the basis of two ways:
- arc elasticity (elasticity arc) for which you want to know the initial and subsequent levels of prices and volumes;
- point elasticity (flexibility at the point) with a given demand function and baseline prices and demand.
Types elasticity of demand is differentiated by price, income, and it can be cross two goods.
factor price elasticity of demand reflects how quantitative changes demand when it is increased or decreased by 1%.It is possible to qualify the following options elasticity:
- inelastic demand - is characterized by a slower pace of growth of the acquired quantity of goods than the rate of decline in prices;
- elastic demand - is characterized by the fact that at lower prices by 1% demand increases by more than 1%;
- unit elasticity - is characterized by the same rate of growth of purchased goods and the number of falling prices.
factor income elasticity of demand reflects how changes to quantify the demand when the income will be higher / lower by 1%.
If this figure is negative, then it is most likely indicative of the poor quality of the goods, because income increases, and the demand for products decreases.
If its positive value of the goods can be considered normal, and:
- if its value is very small, less than 1, ie,demand for certain goods grows slower income, it could be, most likely, of essential commodities;
- if the value of the index more, it is inherent in luxury goods, as income growth lags behind demand for the product.
coefficient of cross-elasticity of demand reflects the change in demand for a certain commodity and if the price of goods in the changes by 1%.It can be positive, negative, and zero.
- Positive values of the coefficient of elasticity are substitute products (interchangeable), which compete in the market, for example, butter and margarine.At higher rates, the demand for margarine oil, because it has become less with respect to the new increased price margarine.And the more the two are interchangeable benefits, the greater the value of this indicator.
- Negative values of this coefficient are accompanying benefits (complementary), they are used together.For example, if we consider the shoes and take care of them, then with an increase in the price of shoes is reduced demand for these tools, it is possible to say that the increase in the price of a good brings with it a reduction of consumption of another, and the more their complementarity, so there will be more absolutecoefficient.
- zero value of the elasticities regard to benefits which are neither interchangeable nor complementary, ie,in this case, it is not visible any connection between the consumption of goods and prices on the other.