Demand elasticity. Price Elasticity Coefficient and Factors affecting price elasticity of demand

An elasticity is a measure of the sensitivity of one variable to another. Specifically, it is a number that tells us the percentage change that will occur in one variable in response to a 1 percent change in mother variable. For example, the price elasticity of demand measures the sensitivity of quantity demanded to price changes, it tells us what the percentage change in the quantity demanded for a good will be following a 1 percent increase in the price of that good. E_p = (%ΔQ)/(% ΔP)

Arc-elasticity:

Point-elasticity:

When the price elasticity is greater than 1 in magnitude, we say that de­mand is price elastic because the percentage decline in quantity demanded is greater than the percentage increase in price. If the price elasticity is less than 1 in magnitude, demand is said to be price inelastic. In general, the elasticity of demand for a good depends on the availability of other goods that can be sub­stituted for it. When there are close substitutes, a price increase will cause the consumer to buy less of the good and more of the substitute. Demand will then be highly price elastic. When there are no close substitutes, demand will tend to be price inelastic.

Factors affecting price elasticity of demand:

Substitution -The more substitutes, the higher the elasticity, as people can easily switch from one good to another if a minor price change is made.

Percentage in the consumer’ income -The higher the percentage that the product's price is of the consumers income, the higher the elasticity, as people will be careful with purchasing the goods because of its cost.

Useful or not -The more necessary a goods is, the lower the elasticity, as people will buy it no matter the price, such as insulin.

The time period under consideration -The longer a price change holds, the higher the elasticity, as more and more people will stop demanding the goods (i.e. if you go to the supermarket and find that blueberries have doubled in price, you'll buy it because you need it this time, but next time you won't, unless the price drops back down again). Elasticity will normally be different in the short term and the long term.

Breadth of definition: The broader the definition, the lower the elasticity

Date: 2016-03-03; view: 1159