What is Elasticity
Elasticity
Elasticity refers to a measure of the sensitivity of a variable in accordance with another variable¡¯s change. This way, one can measure the change in aggregate product demand with respect to price changes. In other words, it is called elasticity of demand. A product shall be termed as elastic if its demand varies more than the proportional amount of change in its price.
Understanding the Working of Elasticity
To properly understand what is elasticity, we need to understand its working. In case the elasticity value exceeds 1.0, it's an indication that the product demand is more than proportionally getting impacted by a variation in price. This is what is meant by elasticity of demand. Here, the purchasing behavior of customers¡¯ changes with a rise or fall in price.
If the value is below 1.0, it¡¯s an indication that the demand has a relative insensitivity to price. This is an inelastic demand. Inelastic means that the product purchasing behavior of consumers does not change when the price rises. Similarly, the behavior does not change when the price drops.
Now, what is meant by elasticity = 0? This is a situation which is termed as 'perfectly' inelastic by economists. Here, at any price, the demand tends to stay the same. This is more like a theoretical concept at best because in the real-world such occurrences are extremely rare. Suppose this was the case in the real world, then it would mean customers would have a need to purchase products irrespective of the price charged.
What is Elasticity of Demand?
A product¡¯s demand would be ¡°elastic¡± in case a small price variation causes a much more significant change in the demand. In other words, customers would demand significantly more or less in accordance with a small variation in price. For example, if petrol prices increase, the amount of its demand will go down. But what is the degree of this demand change- is it significant or moderate or tiny. This question can be understood with the elasticity of demand.
Suppose there is a 5% increase in petrol prices. However, it has almost no impact on the demand for petrol. In such a case, we will say that the price elasticity for petrol demand is inelastic. However, if this 5% rise causes a massive drop in petrol demand, then price elasticity for petrol demand shall be elastic.
Factors Affecting Elasticity of Demand
The elasticity of demand is affected by the following three factors:
Availability of Substitutes: The demand for a product will be more elastic if there are more substitutes present for it. For example, a good substitute for coffee is tea. So, if the coffee price increases, the customer will purchase more tea. Hence, the demand for coffee will go down significantly.
Necessity or Value: If the product has a heavy value or necessity, then its demand is unlikely to change even if the price rises. For example, if prices of medicines massively rise; customers would still be compelled to pay for them. This is because medicines are necessary for treatment and survival.
Time duration: The duration of change in price can affect the elasticity of demand. For example, an alcoholic would purchase alcoholic drinks even if their price rises. So, in the short run, alcoholic drinks are inelastic. However, if the price rise continues to stay unchanged for a long duration of time, the alcoholic may begin to get rid of this addiction. As such in the long run, alcohol demand can become elastic.
What is meant by Income Elasticity?
Income elasticity means the responsiveness of a particular quantity, that is demanded, according to income variation. This income here refers to the real income of customers who purchase the product. The other factors are assumed to be constant here.
Explain the significance of price elasticity to an organization?
Any organization's success depends to a considerable degree on the elasticity of its products. If the organization has high elasticity, then it would challenge others on the basis of price. Also, such an organization would be required to maintain a high volume of sales transactions to avoid insolvency. In contrast, inelastic organizations are in a position to set high prices.
What are the various categories of elasticity?
One can divide elasticity into the following 5 categories:
What is meant by the price elasticity of supply?
The price elasticity of supply refers to a measure that shows the sensitivity of the quantity, that is supplied, in accordance with price variation.
What is meant by the concept of cross elasticity?
The concept of cross elasticity of demand refers to the measurement of a specific quantity¡¯s sensitivity in response to the other product¡¯s price change. Economists also refer to this concept as cross-price elasticity of demand. The way to measure it is to take the percentage variation in demanded product quantity and divide it by the other product¡¯s price percentage change. Good use of cross elasticity is to measure the change in demand for coffee to a change in tea price.
Disclaimer: This content is authored by an external agency. The views expressed here are that of the respective authors/ entities and do not represent the views of Economic Times (ET). ET does not guarantee, vouch for or endorse any of its contents nor is responsible for them in any manner whatsoever. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. ET hereby disclaims any and all warranties, express or implied, relating to the report and any content therein.
Elasticity refers to a measure of the sensitivity of a variable in accordance with another variable¡¯s change. This way, one can measure the change in aggregate product demand with respect to price changes. In other words, it is called elasticity of demand. A product shall be termed as elastic if its demand varies more than the proportional amount of change in its price.
Understanding the Working of Elasticity
To properly understand what is elasticity, we need to understand its working. In case the elasticity value exceeds 1.0, it's an indication that the product demand is more than proportionally getting impacted by a variation in price. This is what is meant by elasticity of demand. Here, the purchasing behavior of customers¡¯ changes with a rise or fall in price.
If the value is below 1.0, it¡¯s an indication that the demand has a relative insensitivity to price. This is an inelastic demand. Inelastic means that the product purchasing behavior of consumers does not change when the price rises. Similarly, the behavior does not change when the price drops.
Now, what is meant by elasticity = 0? This is a situation which is termed as 'perfectly' inelastic by economists. Here, at any price, the demand tends to stay the same. This is more like a theoretical concept at best because in the real-world such occurrences are extremely rare. Suppose this was the case in the real world, then it would mean customers would have a need to purchase products irrespective of the price charged.
What is Elasticity of Demand?
A product¡¯s demand would be ¡°elastic¡± in case a small price variation causes a much more significant change in the demand. In other words, customers would demand significantly more or less in accordance with a small variation in price. For example, if petrol prices increase, the amount of its demand will go down. But what is the degree of this demand change- is it significant or moderate or tiny. This question can be understood with the elasticity of demand.
Suppose there is a 5% increase in petrol prices. However, it has almost no impact on the demand for petrol. In such a case, we will say that the price elasticity for petrol demand is inelastic. However, if this 5% rise causes a massive drop in petrol demand, then price elasticity for petrol demand shall be elastic.
Factors Affecting Elasticity of Demand
The elasticity of demand is affected by the following three factors:
Availability of Substitutes: The demand for a product will be more elastic if there are more substitutes present for it. For example, a good substitute for coffee is tea. So, if the coffee price increases, the customer will purchase more tea. Hence, the demand for coffee will go down significantly.
Necessity or Value: If the product has a heavy value or necessity, then its demand is unlikely to change even if the price rises. For example, if prices of medicines massively rise; customers would still be compelled to pay for them. This is because medicines are necessary for treatment and survival.
Time duration: The duration of change in price can affect the elasticity of demand. For example, an alcoholic would purchase alcoholic drinks even if their price rises. So, in the short run, alcoholic drinks are inelastic. However, if the price rise continues to stay unchanged for a long duration of time, the alcoholic may begin to get rid of this addiction. As such in the long run, alcohol demand can become elastic.
What is meant by Income Elasticity?
Income elasticity means the responsiveness of a particular quantity, that is demanded, according to income variation. This income here refers to the real income of customers who purchase the product. The other factors are assumed to be constant here.
Explain the significance of price elasticity to an organization?
Any organization's success depends to a considerable degree on the elasticity of its products. If the organization has high elasticity, then it would challenge others on the basis of price. Also, such an organization would be required to maintain a high volume of sales transactions to avoid insolvency. In contrast, inelastic organizations are in a position to set high prices.
What are the various categories of elasticity?
One can divide elasticity into the following 5 categories:
- Unitary
- Elastic
- Perfectly elastic
- Inelastic
- Perfectly inelastic
What is meant by the price elasticity of supply?
The price elasticity of supply refers to a measure that shows the sensitivity of the quantity, that is supplied, in accordance with price variation.
What is meant by the concept of cross elasticity?
The concept of cross elasticity of demand refers to the measurement of a specific quantity¡¯s sensitivity in response to the other product¡¯s price change. Economists also refer to this concept as cross-price elasticity of demand. The way to measure it is to take the percentage variation in demanded product quantity and divide it by the other product¡¯s price percentage change. Good use of cross elasticity is to measure the change in demand for coffee to a change in tea price.
Disclaimer: This content is authored by an external agency. The views expressed here are that of the respective authors/ entities and do not represent the views of Economic Times (ET). ET does not guarantee, vouch for or endorse any of its contents nor is responsible for them in any manner whatsoever. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified. ET hereby disclaims any and all warranties, express or implied, relating to the report and any content therein.
