Consumer demand determines the supply of goods, since it is their own needs that induce buyers to pay. The dynamics of this phenomenon is determined by many factors, therefore, with any changes, it is necessary to find the elasticity of demand.
Instructions
Step 1
There is a well-known phrase "Demand creates supply", which in three words reflects the producer / consumer market relations. The more the buyer demands, relying on fashion trends, the desire to follow progress, their own aesthetic and physical needs, etc., the more products the company produces. Conversely, as soon as demand falls, manufacturing companies try to switch to another product or completely change the assortment.
Step 2
To monitor changes in demand and calculate them in advance, you need to quickly conduct economic analysis, in particular, calculate the elasticity. There are price and income elasticities of demand, as well as cross elasticities.
Step 3
There are several factors that influence the decision of manufacturers to raise or lower the price. This is the appearance or disappearance of competing products or substitutes, change of seasons (food, clothing, sports accessories, etc.), shelf life, etc. The price elasticity of demand is calculated as coefficients in two ways: point and arc.
Step 4
The point method assumes knowledge of the price of the beginning of the period and the demand function, as well as the rules of differentiation. The elasticity coefficient is equal to the mathematical ratio between two quantities: E = F '(x) • x / F (x), where: x is the price; F (x) is the demand function by price; F' (x) is the first derivative of the demand function …
Step 5
Arc elasticity can only be found if you have data on the start and end prices and the corresponding production volumes. On the demand function graph, you will see an arc bounded by these values, hence the name. So, the formula for arc elasticity looks like this: E = (V2 - V1) / ((V2 + V1) / 2): (P2 - P1) / ((P2 + P1) / 2), where: V1 and V2 are volumes products at the beginning and end of the arc; P1 and P2 - the starting and ending prices.
Step 6
Income elasticity is determined not by prices, but by the buyer's income. This value depends on the level of wealth, the degree of need (luxury or basic necessities), etc. This elasticity indicator is determined by the ratio of the volume of goods and income: E = (V2 - V1) / ((V2 + V1) / 2): (D2 - D1) / ((D2 + D1) / 2), where: D1 and D2 - income at the beginning and end of the billing period.
Step 7
It is difficult to find a unique product on the market. Typically, each has a counterpart or complementary product that is closely related to it. For example, butter and margarine are interchangeable, and a computer and a computer mouse are complementary. A change in the price of one of these goods inevitably affects the demand for another, this is called cross elasticity: E = ∆V / ∆P • P / V, where: P is the unit price of one good; V is the volume of demand for the second good.
