Elasticity Of Demand Essay Example

product increases and all other conditions remain unchanged, it's natural to see a decrease in demand - this phenomenon is known as negative complements. As a result, consumers tend to buy fewer such products. The scale used to evaluate how income changes affect the quantity demanded is termed as income elasticity of demand. Changes in income due to situations like promotion or job alteration that brings about lesser earnings can trigger variations in demand. Understanding the function of income elasticity of demand is pivotal for grasping how alterations in income impact demands for goods. Generally, individuals with less income tend to be associated with inferior goods while those with greater incomes are often linked with normal goods.

As your income grows, there tends to be a decline in demand and a possible shift towards more upscale alternatives. When people's income increases, they generally buy superior quality items known as normal goods. For instance, during college years, budget limitations may restrict you to purchasing pizza and soft drinks. However, once you finish college and begin working professionally, you might have the budget to dine out and indulge in steak dinners which can significantly enhance your living standard. Items of lesser quality or inferior goods are typically consumed by those with lower incomes since they cannot afford more expensive or healthier options.

An increase in income often leads to a decrease in the consumption of inferior goods, consequently leading to an escalation in the use of normal goods. Elasticity coefficients are quantitative values representing the percentage variation in one element due to a one percent alteration in another factor. The demand elasticity coefficient is derived

by dividing the percentage change in quantity demanded by the price fluctuation. If demand exhibits elastic nature, then its corresponding elasticity coefficient will exceed one. Conversely, if demand demonstrates an inelastic reaction, the percentage modification in quantity demanded will be smaller than that of price.

When demand is inelastic, the elasticity of demand coefficient is below one. This means there's an equal percentage change in both quantity and price. If a shift in pricing prompts a similar shift in demand, it indicates unit elastic demand. The identifying feature of a unit elastic demand curve lies within its slope which equals one; thus, the corresponding elasticity coefficient also equals one for such circumstances. There are three distinct types of elasticity - price elasticity of demand, cross-price elasticity and income elasticity of demand. Each variety essentially measures how fluctuations in different variables impact the demanded quantity. The method to understand how pricing changes affect quantity demanded falls under Elasticity of Demand while Cross-price Elasticity concentrates on evaluating product demands by calculating the ratio between observed percentage change in demanded quantity over witnessed percentage change in its price. Cross-price elasticity can exhibit either positive or negative values.

The concept of cross-price elasticity helps to identify if two products are complements or substitutes. When the cross-price elasticity is negative, it suggests that the products are complements; however, a positive value implies they are substitutes. In contrast, income elasticity gauges how demand for a product shifts in response to fluctuations in income levels. If there's an decrease in income, the product is deemed inferior as consumers tend to opt for more affordable alternatives. On the flip side, when

income rises, the product is perceived as standard since consumers can afford superior options. Therefore, three key factors must be taken into account: variations in the price of a product, adjustments in prices of associated products and changes in consumer earnings.

The government needs to understand the significance of differences in elasticity of demand to price products or goods accordingly and predict their impact on demand. The significance of cross price is assessing the relationship between the price of one product and the demand for another product, helping determine if they are complements, substitutes, or unrelated. Income elasticity becomes significant when considering market demand and supply.

Comprehending the notion of elasticity is essential in understanding how market prices influence and interact with supply, demand, and various markets. This concept is especially significant when it comes to a wide array of goods chosen by consumers. Elasticity can be defined as a coefficient within an equation that encompasses both dependent and independent natural variables. It pertains to specific elements that are extremely sensitive to minor variations in other sectors. The degree of their elasticity might vary based on their level of responsiveness.

Elasticity of demand's dependency on the availability of substitutes becomes more flexible when there are several alternatives to a product, enhancing consumer options. As the price for goods escalates, consumers can opt for cheaper substitutes. The proportion of consumer income allocated to specific goods may vary in elasticity depending on the nature of the product. High expenditure on a product by a consumer could be attributed either to its necessity or luxurious essence.

An illustrative scenario for a logical consequence might

be when an individual allocates 25% of their income for apparel and later opts to alter their expenditure pattern to assign 50% of their wages towards attire. This adjustment would result in the person amplifying the volume of clothing they acquire, leading to a surge in demand for attire overall. It's important to highlight that the duration within which a consumer operates significantly affects how flexible their behaviors are. Given enough time, consumers can adapt and adjust to rising costs, while on shorter timescales, they might promptly decrease their consumption. This capacity for adaptation over time adds to the comprehensive flexibility of influencing factors.

Businesses, when evaluating market conditions, often look into factors such as the presence of alternative products, the duration considered by customers for their purchases and how much of a customer's income is spent on a specific product. If businesses observe that there are plentiful alternatives to their offerings, they may opt to reduce prices in an attempt to lure more customers and boost sales. Over time, consumer demand demonstrates greater flexibility in relation to the customer's purchasing timeframe; however, it shows lower elasticity in the short-term due to consumers requiring time to adapt to changes in price. Nevertheless, for non-essential goods companies can increase prices without triggering detrimental effects on demand.

Businesses often steeply escalate their prices in a relatively short duration. If there is a sudden increase in electricity charges tomorrow, the expected consumer reaction is likely to be minor. However, if given more time to consider these costs, consumers' response may grow much stronger. Businesses persist in pushing up product prices until they observe a decline in

demand. The concept of demand elasticity assesses how customers respond to changes in pricing, especially when sensitivity towards increased expenses becomes heightened. Moreover, an appreciable fraction of consumer earnings frequently gets allocated for necessary commodities.

Should the cost of a coffee cup rise by 10%, the demand is deemed inelastic and inconsequential considering consumers' lack of significant response to minor hikes. Conversely, a 30% increase in rent transforms the demand into an elastic one whereby consumers modify their habits accordingly. In business decision-making, it's crucial to account for the proportion of consumer income allocated to a specific item as it impacts its price elasticity of demand. The higher the price compared to consumer income, the more elasticity in demand there is. Therefore, when evaluated against a customer's budget, a considerable price surge becomes an important factor.

Graphics: A situation arises when consumers are forced to explore different choices as the price of beef spikes, compelling them to look at other types of meat like chicken or pork. The soaring cost of beef compels customers to choose among existing alternatives, leading to a drop in the value of beef. In order to maximize their profits, businesses will collaborate with retailers to reduce beef prices. Customer buying behavior is affected by how a product's price aligns with their income.

Should the cost of soap double, it is not anticipated that consumers would substantially alter their behavior as the demand tends to be inelastic. However, a doubling in the price of a vehicle could cause a significant dent in consumer's budgets and result in more pronounced reactions. This reflects on how consumers adapt over time.

For instance, their dependence on petrol for daily commuting can shift when fuel prices rise; they may explore other commuting options such as sharing rides or using public transportation like city buses.

Consumer demand would be flexible over time, implying no necessity for them to buy any gas. Demand has two distinct categories: absolutely inelastic and absolutely elastic demand. When the demand remains consistent regardless of price variations, it is referred to as perfectly inelastic demand. Inelastic demand symbolizes a scenario where changes in price have minimal or no effect on supply and demand levels for a commodity. Instances of inelastic demand encompass essential goods like milk or bread since they are deemed necessities by most people. Even if the cost of milk doubles, consumers would still keep buying it despite possibly grumbling about the increased expense.

Inelastic demand is linked with indispensable or addictive items. On the other side, perfectly elastic demand is marked by an unlimited request at a specific price, and any rise in cost doesn't alter this demand. This situation exemplifies perfect elasticity of demand. Nonetheless, if there's a variation in price, it results in a decrease in the amount required. Elastic demands occur when product appeal varies with alterations in price. For example, if the price of a new car rises, its requirement rapidly dwindles even though its supply keeps expanding.

Items with elasticity can have substitutes that may be brand new or used. Elements like price, volume, and the demand curve show if an item is entirely elastic or completely inelastic. A horizontal line symbolises a wholly elastic demand curve, while a vertical one illustrates a

totally inelastic demand curve. In graphical representation, the fully elastic demand is depicted as a horizontal line.

The gradient equals to 0, leading Ed to become negative infinity. As the demand becomes more adaptable, its elasticity approaches negative infinity. The idea of perfectly inelastic demand is represented by a vertical demand curve, which signifies that variations in price do not affect the quantity demanded. Supply and demand principles are commonly applied in everyday life, offering consumer options and promoting informed decision-making processes. Whether the supply or demand for a certain product is flexible or rigid relies on how significant it is to most consumers.

Essential items for consumers, at both individual and business levels, exhibit lesser sensitivity to changes in demand. Business strategies are guided by increased demands coupled with a steady supply. In the event of a shortage, prices usually rise. Conversely, if demand reduces while supply stays the same, surplus situations arise leading to price reductions. Furthermore, when demand remains unchanged but supply increases, it results in oversupply and consequently lower prices. However, when demand is consistent but there's an insufficient supply, scarcity ensues causing prices to soar.

A company contemplating a price hike needs to assess the probable effect on sales, other potential options, the portion of income allocated for a specific product, and how long customers ponder over it. These concepts are just as crucial in our personal lives when determining what products to buy and in what amounts. Illustrations of demand elasticity show that the upper part of the demand curve is elastic, while its lower half is inelastic; with unit-elasticity appearing at its center. These visuals

offer valuable information about the variability of elasticity at various cost levels within one demand curve.

When demand is elastic, a price decrease leads to a rise in total revenue. If total revenue changes correspondingly with the price, this indicates that the demand is inelastic. Total revenue staying constant, regardless of price variations, means the demand is unit elastic. The initial four units of the demand curve are identified as elastic, resulting in a decline in price and an increase in both quantity demanded and overall earnings. Importantly, elasticity isn't determined by whether the demand curve is flat or steep.

The curve's gradient is formulated to accommodate fluctuations in price and volume. In contrast, Elasticity deals with percentage shifts in price and volume. The demand curve considers units five to nine as inelastic when the cost decreases. Price inelasticity span refers to the interrelation between the price and total earnings. Any change in pricing will cause a more substantial shift in volume, subsequently leading to an increase in quantity required and a decrease in overall earnings. The area beneath the demand curve represents total revenue, so if demand is inflexible, reducing prices will result in decreased total income.

Despite an increase in sales, the reduction in revenue per unit will not be completely compensated for, resulting in a decrease in total income. At the exact middle point between the fourth and fifth units of the demand curve, demand becomes unit elastic. This suggests that while a price decrease may change the quantity demanded, it does not influence overall revenue. The point of unit elasticity acts as a precise midpoint demarcation on the

demand curve into two equivalent sections. In case of goods with a unit elastic price elasticity of demand, variations in price and quantity are proportionally identical; therefore increasing prices does not affect overall revenue.

Regardless of price fluctuations, the total revenue stays steady and untampered. The correlation between elasticity and total revenue is evident when analyzing the curves on the demand and revenue graph. A dip in elastic demand correlates to a rise in total revenue, while an increase leads to a reduction in total revenue. Hence, if there is an inverse relation between price changes and total revenue, it indicates that the demand is elastic. The area at the center of the demand curve signifies unit elasticity. Conversely, shrinking figures within the non-elastic part of the demand curve tend to lower overall income.

The patterns of price and total revenue are analogous, signifying an inelastic demand. The Elasticity of Demand and Total Revenue graphs depict that a reduction in price leads to a rise in total revenue within the elastic range, extending from the first to fourth unit. On the contrary, between the fourth and fifth unit (unit range), any decline in price corresponds with a decrease in total revenue. Notably, even though a drop in price could bring about an equivalent shift in quantity demanded, it doesn't affect the overall revenue.

The peak of total revenue is reached between the fourth and fifth unit. Regardless of a rise or fall in price, the total revenue remains consistently stable. The segment from the fifth to ninth unit, referred to as the inelastic range, sees no change in total revenue despite potential

decreases in cost. Any further reduction beyond this point would lead to a decrease in overall revenue. The stretch from the first to fourth unit on the demand curve is classified as elastic; hence any decrease within this section results in an increase in quantity demanded.

Between the fourth and fifth units, the demand exhibits unitary elasticity, hitting a high point in total revenue. The demand stays unitary within this range and the maximum total revenue is achieved. As we move along the demand curve from the fifth to ninth units, the demand turns inelastic. A dip in prices within this span would result in a less than proportionate surge in quantity demanded, causing a drop in total revenue.

References

1. Brue, S. L. , Flynn, S. ; McConnell, C. R. (2012).
2. Economics (19e. ). New York, NY: McGraw-Hill.