Coefficient of elasticity of demand

Demand and supply have the ability to adapt to changing market conditions, called elasticity. Today, virtually no division of the economy is complete without this notion: firm theory, supply and demand analysis, economic cycles, economic expectations, IEA, etc.

The sensitivity of the market to these and other factors of market conditions is characterized by a special coefficient of elasticity of demand. The meaning of this indicator is the following: how much in quantitative terms the volume of demand changes, when the market factor changes by 1%.

Depending on the chosen unit of measure, the ability to react one of the economic variables to a change in the other is illustrated by different methods. Therefore, in order to unify the choice, use the percentage measurement method.

The coefficient of elasticity of demand is calculated in two ways based on:

- arc elasticity (elasticity along the arc), for which it is necessary to know the initial and subsequent levels of prices and volumes;

- point elasticity (elasticity at a point) with a given demand function and initial price levels and demand values.

The types of elasticity of demand are differentiated by price, income, and also it can be crossed in two products.

The coefficient of elasticity of demand for price reflects how much the demand varies, when it increases or decreases by 1%. In this case, you can qualify the following options for elasticity:

- Inelastic demand - characterized by lower growth rates of the purchased quantity of goods than the rate of price reduction;

- Elastic demand - characterized by the fact that when the price falls by 1%, demand increases by more than 1%;

- individual elasticity - is characterized by the same growth rates of the purchased quantity of goods and a drop in price.

The coefficient of elasticity of demand for income reflects how much demand will change quantitatively, when the income becomes more / less by 1%.

If this indicator is negative, this is likely to indicate a low quality of the goods, because the income increases, and the demand for products decreases.

With its positive value, the product can be considered normal, and:

- if its value is extremely small, less than 1, i.е. The demand for a certain commodity grows slower than the income, then speech can go, most likely, about essential goods;

- If the value of the indicator is greater, it is inherent in luxury goods, because the growth of income lags behind the demand for the goods.

The coefficient of elasticity of demand cross reflects the change in demand for some goods A, if the price of commodity B changes by 1%. It can be positive, negative and zero.

- Positive values of this coefficient of elasticity refer to substitute products (interchangeable) that compete in the market, for example, butter and margarine. With the increase in the price of margarine, the demand for oil is growing, because it has become cheaper relative to the new higher price of margarine. And the more the two benefits are interchangeable, the greater the value of this indicator.

- Negative values of this coefficient are related to the concomitant benefits (complementary), they are used together. For example, if you look at shoes and care products, then with the increase in the price of shoes, the demand for these products is reduced, that is, it can be said that an increase in the price of some good brings with it a reduction in the consumption of another, and the more their complementarity, the greater the absolute Coefficient value.

- The zero value of this elasticity index refers to benefits that are neither interchangeable nor complementary; In this case, there is no connection between the consumption of one good and the price of another.