In economy different concepts are used, and the elasticity of demand is important criterion for successful trade. Let's apply it to real understanding of supply and demand. Businessmen have to consider surely this indicator in time to reduce or increase cost on goods.
What is elasticity of demand?
Understand the indicator specifying as this term demand is how sensitive to change of different factors. The first Alfred Marchal began to use this indicator in economy. The elasticity of demand is a fine opportunity almost precisely to understand how the buyer for jumps of cost and income level quickly reacts, and on change of other factors. It is important to consider this indicator when developing projects for economic development and forecasting.
What does the elasticity of demand depend on?
There is a certain list of the factors affecting value of the presented indicator:
- If the goods can be replaced with products, similar on qualities, then requirement becomes more elastic.
- Describing the factors affecting elasticity of demand it is impossible to miss this indicator, so, the more at people is time to decide whether it is necessary to make purchase or not, the elasticity will be higher.
- It is proved that demand for gold, diamonds and other luxury goods is more elastic, than on goods which are necessary always.
- Determination of elasticity of demand shows that with what the smaller share is occupied by concrete goods in wastes of buyers, that the value of an indicator will be lower.
Types of elasticity of demand
There are several various classifications of this economic indicator which differ in the main criterion, for example, there is a demand focused on the price, income and so on. All of them are applicable for a specific situation. The elasticity of demand, its types and characteristics have to be considered by businessmen who want to construct successful business.
Price elasticity of demand
The presented criterion shows how the consumer reacts to changes in the cost of goods. If falling of the price forces people to buy more, then speak about good elasticity of consumption. The price elasticity of demand is an important criterion for businessmen and he says through a certain coefficient. This indicator to percentage of change of sales volume is equated to the price. Speak about elasticity even if big fluctuations are observed.
Arc elasticity of demand
Approximate extent of reaction of consumption to jumps of cost, income and other factors is considered arc elasticity. It is called average elasticity, and explains it with the fact that for calculation average values of cost and volume of consumption are used. Use arc value when significant changes in the price and other important factors are observed. The concept of elasticity of demand includes also arc coefficient which always is between two values of dot elasticity for the high and small price.
Dot elasticity of demand
Understand value which is located in one point of a curve of consumption as this term. This size is a constant along the line of supply and demand. Describing types of elasticity of demand, it is impossible to miss from attention a dot look as it describes reaction of consumption to minor changes in cost and in values of other factors. Use it at insignificant increments (usually the value is 5%) or in abstract tasks.
Income elasticity of demand
The measure describing reaction of consumption to change of income it is accepted to call elasticity on income. Apply it to reflection of relative fluctuation of consumption because of change of profit of potential buyers. The elasticity of demand on income is a value which grows or falls depending on importance of goods for family. That fact is considered whether it is luxury goods and demand is how conservative. The presented indicator acts in such forms:
- Positive. Use this option when growth of income provokes increase in volumes of consumption. Carry this option to goods of luxury.
- Negative. In that case the analysis of elasticity of demand specifies that at reduction of demand there is a growth of income. Let's apply this option for the low-quality benefits.
- Zero. Such option specifies that change of income does not influence consumption in any way. Here carry goods which the person buys always.
Cross elasticity of demand
This indicator is applied to express changes in consumption of concrete goods at fluctuation in price of another, at the same time other conditions have to be identical. Speak about elasticity even if the price changes slightly, and demand or strongly grows, or falls. The cross elasticity of demand is an indicator which has three types:
- Positive. Here refer fluctuations of demand to goods which can replace each other. At first consumers buy cheap goods, but when the price of it grows, they can pass to other similar range. The elasticity depends on quantity of goods which can change to the friend of the friend.
- Negative. Such cross elasticity of demand is peculiar to goods which are addition of each other. It is worth noticing that they can belong to different price categories. At negative elasticity if interest in goods falls, then and demand will fall to the supplementing products.
- Zero. In this case demand for some goods does not depend on other products in any way.
How to define elasticity of demand?
To have an opportunity to control changes in demand and in advance to predict fluctuations, it is necessary to carry out in time the economic analysis which includes determination of elasticity of demand. It is worth noticing that to force producers raise the price of goods a large number of factors, for example, emergence of competitors in the market, change of a season, storage period and so on can. Finding out how to calculate elasticity of demand, it is worth specifying that it is necessary to define coefficient and for this purpose there is a special formula.
E=(Q2-Q1)/(P2-P1)*P/Q, where:
- Е – coefficient of elasticity of demand;
- Q2-Q1 – shows gain of the extent of demand;
- P2-P1 – indicates gain of the price;
- Р – cost;
- Q – production volume.