Supply and Demand have the ability to adapt to changing market conditions, is called elasticity. Today, virtually no section of the economy is not complete without this concepts: theory of the firm, analysis of supply and demand, economic cycles, economic expectations, MEO, etc.
The sensitivity of the market to these and other factors in the market situation characterizes a special coefficient of elasticity of demand. The meaning of this indicator is: to what extent in quantitative terms, changing the volume of demand, when the market factor changes by 1%.
Depending on the selected units the ability to respond to one of the economic variables on the change in the other is illustrated by the various methods. Therefore, in order to unify the selection, using the method of interest measurement.
The Coefficient of elasticity of demand are counted in two ways on the basis of:
arc elasticity (elasticity through the arc) for which it is necessary to know the initial and subsequent levels of prices and volumes;
- point elasticity (the elasticity at the point) for a given demand function and initial levels of prices and quantity demanded.
The Types of elasticity of demand differencebut by price, income, and also it can be cross on two commodities.
The Coefficient of elasticity of demand price reflects as quantitatively changes the demand when it increases or decreases by 1%. It is possible to qualify the following options of elasticity:
- inelastic demand – is characterized by lower growth rate of purchased quantities of goods than the rate of decline in prices;
- elastic demand – characterized by the fact that by reducing the price by 1%, demand increases by more than 1%.
- a single elasticity – has the same rate of growth of the quantity purchased of goods and falling prices.
The Coefficient of elasticity of demand under the income is a reflection of how changes quantitatively the demand when the income will be higher/lower by 1 %.
If this figure is negative, it likely indicates low quality of the goods, because the income increases and the demand for products decreases.
When the value of the goods can be considered normal, and
- if its value is extremely small, less than 1, i.e. demand for a particular product grows more slowly than income, it could be, most likely, the commodities;
- if the index value is longer, it is inherent in luxury goods, as income growth lags behind the demand for a product.
The Coefficient of cross elasticity of demand measures the change in the demand for some goods And if the price of a product changes by 1%. It can be positive, negative or zero.
- Positive values of the coefficient of elasticity are the goods-substitutes (interchangeable), which compete in the market, for example, butter and margarine. When you raise the price of margarine increases, the demand for oil, because it has become cheaper in relation to the new higher price of margarine. And the more interchangeable two goods, the greater the value of this parameter.
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Negative values for this coefficient are related goods (complementary), they are used together. For example, if we consider the shoes and care, with the increase in the price of shoes is reduced demand for these funds, that is to say that the increase in prices of some good carries with it a reduction in the consumption of the other, and the larger the complementarity, the greater will be the absolute value of the ratio.
- Zero value for this elasticity applies to goods, which are neither interchangeable nor fungible, i.e. in this case there is no connection between the consumption of one good and the prices more.
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