first law of economics states that between the demand for goods and the price of it has an inverse relationship.However, it is too general statement.For economists, it is equally important to measure the degree of the reaction of consumers to change the price, because the different markets at the same changes in the value of the goods, the amount that the customer wants to buy, changing in many ways.
concept of price elasticity
To measure the sensitivity of demand response or change in quantity demanded to changes in the cost of goods used indicator, which is called the "price elasticity."In other words, the elasticity is a ratio expressed as a percentage change to the demand expressed by the percentage change in the value of goods.
quantitative measure called "coefficient of elasticity," which makes it clear how many percent will change the magnitude of the demand after the price change of goods by one percent.Due to the inverse relationship between the value of the goods and the amount of demand, the elasticity coefficient always takes a value less than zero.However, for comparison purposes, net of economists neglect using the absolute value of the coefficient.
Interpretation of the coefficient of elasticity
value that becomes the price elasticity in each case, gives an indication of the degree of economists elasticity of demand for the commodity in question.Depending on this, there are the following groups of products:
- goods for which demand is elastic.They have a coefficient of elasticity takes a value greater than unity.In this case, there is a sensitive reaction of buyers to changes in the value of goods, resulting in changes in demand more than the cost.If this situation changes in the value of goods entails a change of total revenues from the sale in the opposite direction.
- goods with inelastic demand.Price elasticity calculated for them, takes a value less than unity.In case the price of goods that have inelastic demand, the increase in demand is not enough to compensate for falling revenues as a result of following the price sales of falls.
- goods, price elasticity is equal to one.The price and quantity demanded in this case, the same change as a result of any reduction or increase in the value does not change the revenue from the sale.
Methods of calculating elasticity
coefficient of elasticity can be calculated in two ways:
- When calculating the arc elasticity are taken into account two points between which is measured by the value of elasticity.
- Spot price elasticity of demand is the change in the demand for an infinitely small change in price.The fact that the demand schedule has a convex shape.All this leads to the fact that the price elasticity at each point in the chart takes different values.
definition of price elasticity sometimes causes difficulty in understanding, but not do without any one company.In making a decision on the pricing policy, the organization should be guided by the elasticity of demand for the goods, the change in revenue following the change in value was not unexpected.
