Demand Elasticity
Demand Elasticity (price elasticity of demand) is the difference in demand for a product depending on its price. It is calculated as follows:
Price elasticity is necessary for economists to track changes in supply and demand for a good with changes in its price.
It is equivalent to the percentage change in quantity supplied divided by the percentage change in price. Both elasticities affect the production prices of certain goods.
Understanding Price Elasticity of Demand
Some goods have very inelastic prices from the economists' point of view. That is, when the price of such a product changes, demand does not change. One such product is gasoline. Drivers, motor carriers, and airlines will continue buying it as needed.
Changes in the price of other goods affect demand or supply, which means that such goods are elastic.
Marketing professionals are very interested in this concept. Creating inelastic demand for a product is one of the tasks of a marketing specialist. They achieve this by identifying significant differences between their products and others on the market.
As the price of an elastic product changes, so does the demand for it (the demand point stretches far away from the previous one). If the demand for a product changes insignificantly after a change in its price, then the product is inelastic (not a strong deviation from the previous point).
Factors that affect Price Elasticity of Demand
Availability of substitutes. The easier it is to find a substitute product, the more the price will go down. For example, the rise in price of coffee will cause substitution for tea and the demand for coffee will decrease. Tea and coffee substitute each other in a good way.
Urgency. If the demand for a good decreases when the price rises, then it is a discretionary good. That is, the demand for the product has a greater elasticity. For example, a person would like to buy a new refrigerator, but the one he or she has still works, just the model is old and outdated. The rise in price for a new refrigerator will result in the person not making an immediate purchase. He or she will wait for the price to drop or for the current refrigerator to break down. Addictive goods and necessary extras (inkjet printer cartridges) are also inelastic.
All of these products have no substitutes. If a person has a need for an Apple iPad, he or she will not buy a Kindle Fire. The higher price will not be an obstacle for addicted people, and HP printers will only work with HP ink (unless you turn off HP cartridge protection).
Duration of price change. It also matters. The change in demand caused by price fluctuations in a one-day sale is different from the change in demand when the price fluctuates over a season or a year. Price behavior is very important for tracking and modeling the price elasticity of demand for different products. Consumers find it easier to accept seasonal price changes than to change their habits.
Types of Price Elasticity of Demand
They depend on the percentage change in quantity demanded divided by the percentage change in price.
In general, a product is considered elastic if a small change in price causes a greater change in the quantity of the purchased product. For example, if the price increases by 10%, the demand drops by 15%.
If the change in the quantity of purchased goods and the change in price correspond, the price elasticity of the goods is unitary. That is, when the price changes by 10%, the quantity of the purchased goods also changes by 10% (10%/10% = 1).
A product is inelastic if the price changes are greater than the quantity purchased changes. For example, demand for a product decreases by 10% when the price increases by 10%.
