Chapter 4. ELASTICITY OF DEMAND AND SUPPLY
4.1. The concept of & quot; elasticity & quot;
Elasticity (elasticity) - the numerical characteristic of the change in one indicator (for example, demand or supply) to another indicator (for example, price, income), showing how much the first indicator will change when the second one changes by 1%.
The economic definition of elasticity was first given by A. Marshall in 1885. A well-known English scientist did not invent this concept, but using the achievements of English classics (A. Smith and D. Ricardo) and the mathematical school in economic theory, gave a definition of the coefficient of price elasticity of demand.
The most common definition of the coefficient of elasticity is the ratio of the relative increment of the function to the relative increment of the independent variable
For demand and supply functions, such independent variables can be prices, income level, costs, etc.
Introduction to the concept of "elasticity" in economic analysis was of great importance. On the one hand, the elasticity coefficient is a tool of statistical measurements, including actively used in marketing research (consulting firms in the US take from $ 50 to $ 75 thousand for calculating elasticity for private firms). On the other hand, the concept of elasticity serves as an important tool for economic analysis, because in science it is not enough just to measure, it is also necessary to be able to explain the result obtained.
Today there is not a single section of the economy where the notion of elasticity is used: the analysis of supply and demand, the theory of the firm, the theory of economic cycles, international economic relations, economic expectations, etc.
There are the following products with elastic demand at a price:
o luxury goods (jewelry, delicacies);
o goods, the value of which is palpable for the family budget (furniture, household appliances);
o easily replaceable goods (meat, fruit). Goods with inelastic demand for the price:
o Essential items (medicines, shoes, electricity);
o goods, the value of which is negligible for the family budget (pencils, toothbrushes);
o hard-to-replace goods (bread, light bulbs, gasoline).
Elastic (at the price) is considered a supply or demand, when the change in the quantity of demand (supply) is greater than the change in the price (E & gt; I).
Inelastic is the demand or supply, when the change in the value of demand (supply) is less than the change in price (E & lt; 1).
4.2. Elasticity of Demand for Price
Economists measure the reaction (sensitivity) of consumers to the price change of the product, using the concept of price elasticity of demand.
The elasticity of demand for a price (price elasticity of demand) (price elasticity of demand) - the relative change in the volume of demand when the price changes by 1%.
Elasticity of demand - is the response of the magnitude of demand for price changes. If a small price change leads to a significant change in demand, then the demand is elastic; if a small change in price leads to an insignificant change in demand, then the demand is inelastic.
Elasticity of demand (Ed) is measured by the following formula
Percent changes are calculated by dividing the amount of change in the quantity of the requested product by the original quantity of output by changing the price to the original price
where O - demand (quantity);
P - The yen.
Depending on the absolute value of the elasticity coefficient, the following types of price elasticity of demand are distinguished:
o Absolutely elastic demand (coefficient Е (1 = со), when the smallest price change leads to an increase in sales of the requested products, graphically it is represented by a demand curve, parallel to the horizontal axis.This occurs only in a purely competitive market (Figure ALa)
o elastic demand (coefficient Ea> 1), when the percentage change in its magnitude is greater than the percentage of price change. For example, if a 2% price decrease leads to an increase in demand of 4%, then the demand is elastic. With elastic demand, the elasticity coefficient will always be greater than one. In this case, it is equal to two (Figure 4.16);
o the demand for unit elasticity (coefficient Еи = 1), when a border situation arises between elastic and inelastic demand. the percentage change in price and the subsequent percentage change in the amount of the requested product are equal in value: the elasticity coefficient is equal to unity. For example, when the price drop for 1% causes a 1% increase in sales (Figure 4. c)
o inelastic demand (coefficient E (1 & lt; 1), when the percentage of change in its value is less than the percentage of price change.If the price reduction by 3% the demand is inelastic, if the demand is inelastic, the elasticity coefficient will always be less than unity, in this case it will be 1/3 (Figure 4.2a),
o completely inelastic demand (coefficient Ea = 0) - when the price change does not lead to any change in the amount of requested products. Whatever the price, even 100 times more than the original price, they will still buy alcohol, cigarettes, drugs, insulin, etc. Graphically, it is represented by a demand curve parallel to the vertical axis (Fig. 4.26).
Fig. 4.1. Demand elasticity graphs
Fig. 4.2. Inelasticity Demand Graphs
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