Elasticity of demand

Demand expresses the solvent desire of consumers to buy goods at certain prices. At the heart of this desire is the concept of marginal utility of the product (increase in utility when consuming each purchased unit of the product). Demand is directly influenced by the consumer's purchasing power . At different price levels, consumers can purchase a different quantity of goods. The higher the prices, while maintaining all other conditions, the lower the demand, and vice versa.

The elasticity of demand reflects the degree of sensitivity of demand for goods to a change in various factors (prices, people's incomes, etc.). If the demand for a product depends heavily on a change, for example, the price of it, then it is called elastic, if the price does not affect demand, it is called inelastic.

There are types of elasticity of demand:

1. Elasticity in price. The coefficient of this indicator is calculated as the ratio of the percentage of change in demand to the percentage of price changes. When the price changes, the demand can be elastic, inelastic or have a single indicator.

Such elasticity depends on the degree of necessity of the goods, the number of substitute goods and the time factor.

2. Elasticity in income. The coefficient equals the ratio of the change in demand to the change (decrease or increase) in the income of buyers in percent. Shows how much the volume of demand for a product changes with a change in consumer income by 1%. The coefficient can be positive and negative.

Depending on how the income change affects demand, there are such groups of goods: the highest category (quality goods) - the demand grows in proportion to the growth of incomes; The lowest category (cheap goods of low quality) - on the contrary; The goods of the first necessity (the volume of their consumption practically does not depend on change of incomes).

3. Cross-elasticity of demand. The coefficient of the indicator is determined by the ratio of the change in demand for a commodity of the form of one (X) to a change in demand for a product of another type (Y). If the coefficient is greater than one, then the goods are interchangeable, if less, then they are complementary; If it is zero, then the goods are conjugate.

The elasticity of demand is affected by a number of factors:

• Time factor. If there is time to make a purchasing decision, the demand for the goods becomes more elastic.
• Replaceability. If the product has quality substitutes, then the elasticity of demand for it will always be high. For example, the demand for insulin will never be elastic, regardless of the price for it, because the medicine is vital for people with diabetes.
• The share that the customer spends on the goods. The more it is, the more elastic the demand will be. With a uniform increase in prices, the consumer would rather refuse to buy a car than stationery. Because pens are bought much more often.
• Advertising and marketing. The more we recognize the product due to good advertising, packaging and other signs, the more loyal to it the consumer's attitude and less elastic demand for it.
• Luxury goods or essentials. The first group of goods (gold, jewelry, expensive cars) demand is always more elastic than the second (products, household chemicals).
• Personal preferences and tastes of consumers also significantly affect the degree that the elasticity of demand has.

Point elasticity of demand is an indicator measured at one point in the demand curve, which is constant along the entire line. This is an indicator of the sensitivity of demand to the change of any other indicators.

Thus, the elasticity of demand - the reaction of this indicator to a change in supply or other significant factors. It is measured by the elasticity coefficient.