Elastic and inelastic demand, the concept of elasticity

demand - this is the amount of goods or services that buyers are willing to buy at current prices over time.Between the demand for the product and its price there is the following relationship: the higher the price, the fewer the number of consumers willing to buy it - and vice versa.This relationship is called the "law of demand".

However, economists and analysts is not enough just to predict the impact on the quantity demanded changes in current prices.Great importance is the extent of such changes.The force with which the change in demand, depending on various factors, called "demand elasticity."There are several types of such elasticity: price, cross and income elasticity.Each type of the features.

Price elasticity shows how the demand, depending on price fluctuations, and is expressed by the coefficient of elasticity:

Ed = (ΔQ / Q): (ΔP / P), where

ΔQ / Q - change in the amount of purchased goods,

ΔP / P - changes in the value of the product.

also the elasticity of demand can be calculated as a percentage:

Ed =% Q /% P, where

% Q - the percentage increase or decrease in demand,

% P - the percentage increase or decrease in price.

This ratio shows how demand will change if the price of goods will increase or decrease by 1%.

Cross elasticity, in turn, characterizes the level depending on the demand for the first product, depending on the fluctuations in the value of another.The formula of this indicator following:

Eab = (ΔQa / Qa): ​​(ΔPb / Pb), where

ΔQa / Qa - changes in demand for the first product and,%;

ΔPb / Pb - price change of the second item b,%.

Income elasticity similar to the elasticity of the price, but as a factor affecting the level of demand, is now the size of the income.

Ei = (ΔQ / Q): (ΔI / I), where

ΔQ / Q - change in the number of items sold,

ΔI / I - the relative change in the level of income.

Depending on the coefficient obtained emit these types of flexibility:

1. Ed = 0.

In this case, we have absolutely inelastic demand.Zero coefficient indicates that price fluctuations do not affect the amount of purchased goods.Typically, this essential drugs, such as insulin.

2. Ed & lt;1.

If the value ranges from 0 to 1, it indicates inelastic demand.Consequently, slightly higher prices will affect sales.If the company decides to reduce the margin on products with inelastic demand, instead of the expected increase in sales it will get a decrease in revenue.Examples of products with inelastic demand, are food and essential commodities.

3. Ed = 1.

When the unit elasticity of price changes will not affect the amount of revenue.It is in this case the maximum size.An example is the demand for a variety of transportation services, which tends to vary equally with fluctuating fares.

4. Ed & gt;1.

elasticity of demand, which is greatly dependent on price fluctuations.Firms that sell such products, it is recommended to reduce the prices of their products, since it will increase the income from the sale.

5. Ed = ∞.

This means that the demand for this product is characterized by absolute flexibility.With stable prices is a periodic change in the demand for these products.An example of such products can serve as luxuries.

on elastic and inelastic demand is influenced by various factors.The most important ones are the following:

• the number of substitutes such goods.If the goods have a lot of good substitutes, and the elasticity is high;

• the share of such a product in the revenue of the buyer.The dependence is directly proportional to the higher proportion of the higher elasticity;

• importance of the product to the consumer - whether the goods or luxury goods is an everyday product.Of course, the demand for luxury goods is more elastic;

• the time factor.The more time the buyer has, the higher elasticity.