Elastic and inelastic demand, concept of elasticity


2020-07-02 22:44:08




1Like 0Dislike


The Demand – is the amount of goods or services that buyers are willing to buy at current prices over a certain period of time. Between the demand for the product and its price there is the following dependence: the higher the price, the fewer consumers are willing to buy it, and Vice versa. This dependence is called the ‘law of demand”.

However, economists and analysts it is not enough just to predict, how will the quantity demanded change in current prices. More important is the degree of this change. The force with which the change of demand depending on various factors is called "elasticity of demand”. There are several types of such elasticity: price, cross and income elasticity. Every type has its own characteristics.

Price elasticity shows how the demand varies depending on price fluctuations and is expressed through the coefficient of elasticity

Ed = (∆Q/Q): (∆P/P), where

ΔQ/Q-the change in the number of items to be purchased,

ΔP/P – changes in the cost of the product.

Also a measure of elasticity of demand can be calculated in percentage terms:

Ed = %Q/%P

%Q & ndash; the percentage increase or decrease in demand

%R & ndash; the percentage increase or decrease.

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

Cross-elasticity, in turn, indicates the level of demand for the first product depending on fluctuations in the value of the other. The formula of this indicator is as follows:

Eab= (∆Qa/Qa): (∆Pb/Pb), where

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

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

The income Elasticity similar to the elasticity for the price, however, the role of the factor influencing the level of demand is income.

Ei = (∆Q/Q): (∆I/I), where

ΔQ/Q-the change in the number of goods sold

ΔI/I – relative change of income.

Depending on the obtained ratio there are the following types of elasticity:

1. Ed = 0.

In this case we have a completely inelastic demand. A zero coefficient means that price fluctuations do not affect the number of purchased goods. As a rule, it is an indispensable medical drugs, e.g., insulin.


Staff evaluation: system and methods

Staff evaluation: system and methods

Personnel Assessment allows you to identify how competent the employees involved in the enterprise, and it is the performance of their work – the most significant factor affecting the efficiency of the company. To clarify the impact of performa...

How to start your own business: important aspects.

How to start your own business: important aspects.

Many people, tired of working for someone else, are increasingly thinking about how to start your own business. Someone wants to open a salon, someone store, and someone enough and vegetable stalls. Before you throw in the pool with his head, it is i...

business activities. its essence and basic functions

Business activities. its essence and basic functions

The Entrepreneurial activity of the citizen – is undertaken at your own risk and independent activity, which aims to systematically profit through the sale of works, goods, services, use of the property. The citizen engaged in such activities, ...

2. Ed < 1.

If the resulting value is in the range from 0 to 1, this means inelastic demand. Consequently, the price increases a little impact on sales. If the firm decides to reduce the margin on goods with inelastic demand, instead of the expected increase in sales it will get lower revenues. Examples of goods with inelastic demand are food products and commodities.

3. Ed = 1.

When unit elasticity, the price change will not affect the amount of revenue. It is in this case has a maximum size. An example is the demand for various transportation services, which tends to vary equally with the fluctuation of the cost of travel.

4. Ed > 1.

The elasticity of demand, which is significantly dependent on price fluctuations. Firms that sell such goods, it is recommended to reduce the prices of their products, since this 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 there is a periodic change in the demand for these products. An example of such products can serve as luxury items.

Elastic and inelastic demand is influenced by various factors. The most important of them are:

• number of substitutes of such goods. If a product has many good substitutes, the elasticity will be high;

• the specific weight of the product in income of the buyer. Dependence directly proportional: the higher the proportion, the higher the elasticity;

• the importance of the product for the consumer – whether a luxury item or is it an everyday product. Certainly, the demand for luxuries is more elastic.

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

Comments (0)

This article has no comment, be the first!

Add comment

Related News

Funding sources for business

Funding sources for business

One of the ways of ensuring entrepreneurship is financing. Will there be implemented a project for development and establishment depends on whether found the funds. the funding Sources are divided into two large groups: internal a...

The coefficient of elasticity of demand

The coefficient of elasticity of demand

 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 de...

What is an audit?

What is an audit?

Every entrepreneur should clearly understand what audit is and why you need it. Audit activity is a complex of measures aimed at conducting a thorough check of correctness of drawing up and keeping of accounting and financial and ...