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Elastic demand is a measure of how much people are willing to buy at different prices. The demand for most products is not perfectly elastic, which means that people will still buy the product even if the price goes up or down by a small amount. However, some products have perfectly inelastic demand, which means that people will only buy the product if the price is exactly right. Other products have perfectly elastic demand, which means that people will buy the product no matter what the price is. The demand for most products falls somewhere in between these two extremes.

Measurement of demand Elasticity

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Elasticity is measured by the elasticity coefficient, which is the percentage change in quantity demanded divided by the percentage change in price. If the elasticity coefficient is greater than 1, then the demand is elastic. If the elasticity coefficient is less than 1, then the demand is inelastic. But if the elasticity coefficient is equal to 1, then the demand is unitary elastic.

Elasticity can also help predict how demand will change in response to changes in price. For example, if the elasticity coefficient is less than 1, then demand will decrease when prices increase. On the other hand, if the elasticity coefficient is greater than 1, then demand will increase when prices increase. Elasticity is an important concept because it affects how much revenue a company can generate. If demand is inelastic, then a company can increase prices and still generate the same amount of revenue. On the other hand, if demand is elastic, then a company will need to lower prices in order to generate the same amount of revenue.

The elasticity of demand can also be affected by how much people rely on a product. For example, people who rely on a product to live (such as food or water) are less likely to switch to a different product, even if the price increases. This means that the demand for these products is more inelastic. On the other hand, people who do not rely on a product as much (such as luxury items) are more likely to switch to a different product if the price increases. This means that the demand for these products is more elastic.

Elasticity is typically divided into three categories: 

  • Perfect elasticity,
  • Unit elasticity and
  • Inelasticity.

Perfect Elasticity

Perfectly elastic demand means that the quantity demanded will change infinitely in response to even the smallest change in price. An example of this would be a customer who is only willing to buy one box of cereal, no matter the price. If the price of the cereal increases by $0.01, the customer will not purchase any boxes of cereal.

This is usually the case with products that have many substitutes, such as gasoline. If the price of gasoline goes up by even a small amount, people will switch to using another form of transportation, such as public transportation or bicycles. In general, the more substitutes there are for a product, the more elastic the demand will be. This is because people have more options and are less likely to be loyal to any one brand. On the other hand, the less substitutes there are for a product, the more inelastic the demand will be. This is because people have fewer options and are more likely to be loyal to a particular brand.

Unit elasticity

Unit elasticity is when a change in price leads to an equal percentage change in quantity demanded. An example of this would be a customer who is willing to purchase two boxes of cereal at $2.00 per box, but would only purchase one box of cereal if the price increased to $4.00 per box. In this case, a 100% increase in price leads to a 50% decrease in quantity demanded.

Inelasticity

Inelasticity is when a change in price leads to a smaller percentage change in quantity demanded. An example of this would be a customer who is willing to purchase two boxes of cereal at $2.00 per box, but would purchase three boxes of cereal if the price increased to $4.00 per box. In this case, a 100% increase in price leads to a 25% increase in quantity demanded.

Price Elasticity of Demand (PED)

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Price elasticity of demand (PED) is an economic measure of the change in the quantity demand or purchase of a good or service in relation to price changes for that good or service. The concept of price elasticity of demand was first coined by British economist Alfred Marshall in his textbook Principles of Economics.

In general, the PED for a good or service is inelastic if a change in price leads to a smaller change in quantity demanded, and is elastic if a price change leads to a larger change in quantity demanded. The PED can also measure how much revenue a company will lose (or gain) as a result of a price change.

There are several factors that affect the PED of a good or service, including the availability of substitutes, the necessity of the good or service, and the amount of time that consumers have to adjust to the price change.

Measurement of PED

The PED is typically a percentage change in quantity demand (or purchase) in response to a 1% change in price. For example, if the PED of a good or service is -2, then a 1% increase in price will lead to a 2% decrease in quantity demanded.

PED can also be expressed as a range, such as -2 to -4, which means that a 1% change in price would lead to a 2-4% change in quantity demanded.

Note:

The PED can also be negative, which means that an increase in price leads to an increase in quantity demanded. An example of this would be a customer who is willing to purchase two boxes of cereal at $2.00 per box, but would purchase three boxes of cereal if the price decreased to $1.00 per box. In this case, a 100% decrease in price leads to a 50% increase in quantity demanded.

The PED of a good or service is an important concept for businesses to understand, as it can help them to make pricing decisions that will maximize revenue. It is also a useful tool for economists to measure and predict changes in consumer behavior.

Income Elasticity of Demand (YED)

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Income elasticity of demand (YED) is a measure in economics to show how responsive, or elastic, the demand for a good or service is to changes in income. It is the percentage change in quantity demand for a good or service divided by the percentage change in income. A YED greater than 1 indicates that an increase in income will lead to a greater than proportionate increase in demand, while a YED less than 1 indicates the opposite. A YED of 0 indicates that changes in income have no effect on demand.

Income elasticity of demand is important to businesses because it can help them predict how changes in income will affect sales. It is also a useful tool for policymaking. For example, if the government wants to encourage people to save more money, it could do so by increasing taxes on luxury goods, which are likely to have a high YED.

Income elasticity of demand can also help understand how changes in income affect different types of goods and services. For example, necessities such as food and shelter have a low YED because people will still need them even if their income decreases. Luxuries, on the other hand, have a high YED because people are less likely to buy them when their income decreases.

Measurement of YED

Calculate YED using the following formula:

YED = (% change in quantity demanded for a good or service) / (% change in income)

For example, if the quantity demanded for a good increase by 10% when income increases by 5%, the YED would be 2.

Note:

Income elasticity of demand can be either positive or negative. A good or service has a positive income elasticity of demand if an increase in income leads to a proportionate or greater increase in demand. A good or service has a negative income elasticity of demand if an increase in income leads to a decrease in demand.

Factors Affecting Income elasticity of demand

Income elasticity of demand is affected by a number of factors, including the type of good or service, the level of income, and the availability of substitutes (discussed below).

Type of good or services

Necessities such as food and shelter have a low-income elasticity of demand because people will still need them even if their income decreases. Luxuries, on the other hand, have a high-income elasticity of demand because people are less likely to buy them when their income decreases.

The level of income

Income elasticity of demand is also affected by the level of income. Goods and services that are only affordable to people with high incomes will have a high-income elasticity of demand, while goods and services that are affordable to people with low incomes will have a low-income elasticity of demand.

Availability of substitutes

Finally, the availability of substitutes also affects income elasticity of demand. If there are a lot of substitutes for a good or service, then the income elasticity of demand will be high. If there are few substitutes, then the income elasticity of demand will be low.

Thus, income elasticity of demand is an important tool for businesses and policymaking because it helps to understand how changes in income will affect sales and different types of goods and services. Necessities have a low-income elasticity of demand while luxuries have a high-income elasticity of demand. The level of income and the income elasticity of demand for a good or service can help to predict changes in sales when income changes. Businesses can use income elasticity of demand to make pricing and marketing decisions. For example, if a business knows that its product has a high-income elasticity of demand, it can raise prices when incomes rise without fear of losing customers.

Substitute Elasticity of Demand

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Substitute elasticity of demand refers to how sensitive the demand for a good or service is to changes in price, when there is an easy substitute available. The availability of a substitute makes the original good or service more sensitive overall to price changes. This concept is important to understand when setting prices for goods and services, as it can impact how demand will change in response to price changes.

Substitute Elasticity of Demand can help businesses make pricing decisions that will optimize revenue. For example, if the demand for a good is more elastic (i.e., more sensitive to price changes), then a business may want to set a lower price in order to increase demand. On the other hand, if the demand for a good is less elastic (i.e., less sensitive to price changes), then a business may want to set a higher price in order to increase revenue.

It is important to note that Substitute Elasticity of Demand is just one factor that can impact demand for a good or service. Other factors, such as income and preferences, can also impact demand. As such, businesses should consider all factors when making pricing decisions.

When there is a substitute available, the original good or service becomes more sensitive to price changes.

This concept is important to understand when setting prices for goods and services, as it can have a significant impact on demand. Substitute Elasticity of Demand can be used to help businesses make pricing decisions that will optimize revenue. For example, if the demand for a good is more elastic (i.e., more sensitive to price changes), then a business may want to set a lower price in order to increase demand. On the other hand, if the demand for a good is less elastic (i.e. less sensitive to price changes), then a business may want to set a higher price in order to increase revenue. However, it is important to note that Substitute Elasticity of Demand is just one factor that can impact demand for a good or service and businesses should consider all factors when making pricing decisions.

If demand is perfectly elastic, then what is the effect of an increase in price?

Answer: If demand is perfectly elastic, then an increase in price would lead to a decrease in quantity demanded

This is because consumers would be willing and able to purchase less of the good or service at a higher price. Therefore, firms would need to sell fewer units in order to make up for the higher price. In other words, there would be a shift in the demand curve to the left. This would lead to a decrease in total revenue for the firm.

Which of the following statements is an example of perfectly elastic demand?

  1. Juan lowered the price of his peaches by a penny a pound. When he found that she had more buyers than other sellers in the farmers’ market.
  2. Ali did not purchase many movie tickets, despite the fact that ticket prices fell by 5 percent.
  3. After a six percent price increase, Walgreens does not detect any change in the number of people buying chlorthalidone.
  4. The Jutt family goes to the same pizza restaurant on a weekly basis because it has the best sauce.

Answer: Option (A) is Correct answer. It is an example of perfect elastic demand. If price changes, then demand would adjust perfectly to that change in price. 

Which of the following factors will make the demand for a product relatively elastic?

  1. The purchase of the good requires only a tiny percentage of consumers’ budgets.
  2. The time interval considered is long.
  3. The good is considered a necessity.
  4. There are a few alternatives/substitutes.

Answer: Option (B) is correct.

The answer to this question depends on a number of factors, including the nature of the product, the time frame in which demand is being considered, and the overall economic conditions. In general, products that are necessities or that have few close substitutes will have inelastic demand. Additionally, demand for a product is usually more inelastic in the short run than in the long run, as consumers are generally less able to change their consumption patterns in the short term. Finally, when the economy is doing well, people are generally less price sensitive and demand for products is more inelastic, while during economic downturns people become more price sensitive and demand for products is more elastic.

Example of Elastic products

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As we know that elastic products are those that see an increase in demand when prices are raised and a decrease in demand when prices are lowered. A good example of an elastic product would be a brand of cereal. If the price of the cereal were to go up, people would still buy it because it is a staple item. However, if the price were to go down, people would be more likely to purchase the cereal because it is now a better value. This is why companies will often raise prices on elastic products when demand is high and lower prices when demand is low. Some others examples of elastic products are given below;

  • A can of Coca Cola
  • A Porsche Sports Car
  • A pair of Nike shoes
  • A box of Kellogg’s cereal
  • A bottle of Jack Daniels whiskey
  • Soft drinks
  • Clothing products
  • Electronics 

Elasticity is determined by how much one’s demand for a good change in relation to price changes. If the demand for a good increase when the prices are raised, then the good is inelastic and vice versa. In general, necessities have inelastic demand because people will continue to purchase them even if the prices increase. On the other hand, discretionary items like vacations and luxury goods have more elastic demand because people are willing to forego them if the prices go up.

Wrapping-up:

Thus, elasticity is an important concept in economics and can be used to make better decisions about pricing and production. It is important to remember that elasticity is not always constant and can change in response to different factors. Elasticity is also important because it affects how much consumers pay for a product. If demand is inelastic, then consumers will pay a higher price for a product. On the other hand, if demand is elastic, then consumers will pay a lower price for a product.

Sofia Nikolaishvili
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Sofia Nikolaishvili

After earning a professional degree in linguistics and literature I decided to try out blogging to explore my passion for writing and gain first hand experience. I write about everything I'm interested...

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