Let’s first discuss the concept of the elasticity of demand. The elasticity of demand is the response to shifting in one of the variables on that demand depends on the quality of a required product. Furthermore, it’s the percentage shift in the required amount divided by the percentage that depends on demand. The variables on which demand relies are – the price of the commodity, consumer’s income, etc.
If a price for a certain product increases, the market for that product decreases. The elasticity of demand measures the intensity of the price drop. Demand is elastic if there is a huge shift in the market with a minor price change. On the other hand, it is inelastic or not so elastic when a significant price change causes a slight change in demands.
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Elasticity of Demand
When a 10 percent rise of a product’s price results in almost no change in consumers’ need to consume the product, the price elasticity remains not elastic in such a case. But if the price hike results in a drastic reduction of demands among the consumer, the elasticity of demand are elastic.
Let’s take a look at a few examples:
a) The price of television drops from 300$ to 200$. As a result, the demand for televisions increases from 100 to 200 units.
b) The price of gas has jumped from 2$ per unit to 3$ per unit. Due to the price hike, the demand decreases from 500 liters to 300 liters.
As you can notice, in both cases above, as the price decreases the demand increases and it also happens the other way around. The demand for television and sugar, therefore, reacts to changes in price.
How the elasticity of demand functions:
As mentioned earlier demand for a product is called “elastic” if a little price change influences people to demand more or less of the product. And it is “inelastic” if a minor price change causes the consumer to change a little about how much they want the product.
The elasticity of demand also depends on the length of time. For example, if the price of cheese reduces, you may not feel the urge to increase your consumption of cheese. But a month later, you may realize that you are putting cheese on your meal more than you ever did.
Consumers may even overreact to a price change. They often feel afraid that the price will increase again quickly and they will miss out on such a chance. So, the price elasticity is likely to evolve gradually. Also, sometimes it takes time for the consumers to adapt to the abrupt price change.
Types of Elasticity
The elasticity of demand has three types. There is a distinction between price elasticity, income elasticity, and cross elasticity. Price elasticity is the response of demand to price change. Income elasticity means a shift in demand in response to the rise in consumers’ income. And last but not the least, cross elasticity depicts a shift in demand for a product due to a change in the price of another product. For example, vegan people may switch to soy milk, if the price of almond milk increases to a great extent.
Degrees of Price Elasticity of Demand
There are a total of five degrees of elasticity of demand.
Perfectly Elastic Demand:
It is also referred to as infinite elasticity. The demand is considered to be completely elastic if the quantity of a product rises exponentially with a small drop in price. This demand has no practical value in real life.
Perfectly Inelastic Demand:
Demand is said to be inelastic if the demand is constant regardless of the rise and fall of price. This is why it is called “zero elasticity”. This type of elasticity is also rare in our everyday life.
Relatively Elastic Demand:
Demand is relatively elastic when the percentage demand change is higher than the price change percentage. If the demand change is huge then it can cause a minor increase in price. Relatively elastic demand is also referred to as high elastic demand or simple elastic demand.
Relatively Inelastic Demand:
The demand is stated to be inelastic if the increase in percentage is smaller than the price shift in percentage. It is also known as less elastic demand.
Unitary Elastic Demand:
If the percentage change in demand is equal to the percentage change in price, it is stated as unitary elastic demand. This type of demand cannot be applied in our practical life as it is very rare.
Advantages of Elasticity of Demand
To make production profitable, it is essential to produce the number of goods and services that correspond to the demand for the product. As demand changes are a result of price change, knowledge of elasticity is inevitable to determine the output level.
The price of a product is determined by the elasticity of that product’s demand. If the product demand is inelastic, the manufacturer can charge a crazy high cost for it. On the other hand, when it comes to an elastic product he will charge less. Therefore, the knowledge of elasticity is crucial to maximizing profit.
This concept has a great deal of importance to determine the price of various production factors. Production factors are defined based on their demand elasticity. If the demand is inelastic, the price will be high and if it is elastic the price will be lower.
When it comes to deciding policies, knowledge of demand elasticity comes handy for the government. The government considers the elasticity of demand for certain products before imposing the legislative price.
To conclude, the elasticity of demand is a rudimentary concept of economics. Now that you have read more about it let’s hope that your idea of the concept is a bit more clear than before!