The elasticity of demand allows us to determine the change in the demand of buyers when a factor that influences their choice changes. The most significant determinants of demand is the price of a product.
Instructions
Step 1
The price elasticity of demand shows the degree of quantitative change in demand when the price changes by 1%. It is calculated as the percentage of the change in the amount of demand to the change in the market price of the product.
Step 2
The dependence of the volume of demand on the price can be expressed in different ways. If the price of a product decreases by one percent, and the purchased quantity of a product increases at a slower pace, then one speaks of inelastic demand. With elastic demand, with a decrease in the price of a product by 1%, the demand for it increases most rapidly. With a unit elasticity, when the price decreases by half, the demand also doubles, i.e. the rate of decline in price and rate of growth in demand are the same. If demand is absolutely inelastic, then any price change does not affect the volume of demand in any way.
Step 3
The price elasticity of demand is determined by several factors. It is influenced by the availability of substitute products on the market. The more there are, the more elastic the demand. These products include food products. But the demand for salt, which has practically no substitutes, is inelastic. In addition, the elasticity depends on the share of the consumer's income attributable to the given product. The higher it is, the more elasticity. The elasticity of demand also depends on the degree of necessity of the given product for the buyer, the variety of possibilities for using the purchased product, and the time of adjustment to price changes.
Step 4
There is also a coefficient of cross-price elasticity of demand. It shows the relative change in the volume of demand for one product when the price of another changes. If this coefficient is higher than zero, then there is an interchangeability of goods, i.e. when the price of one product rises, the demand for another increases. For example, if the price of potatoes rises, the demand for pasta will rise.
Step 5
If the coefficient of elasticity is greater than zero, then they speak of the complementarity of goods, i.e. when the price of one commodity rises, the demand for another falls. For example, when the price of gasoline rises, the demand for cars decreases. When the elasticity coefficient is equal to zero, the goods are independent, i.e. an increase in the price of one product does not in any way affect the level of demand for another.
