Demand expresses a solvent desire of consumers to buy goods at certain prices. The basis of this desire is the concept of marginal utility of a product (an increase in utility in the consumption of each purchased unit of goods). Demand is directly affected by the purchasing power of the consumer. At different price levels, consumers can purchase different quantities of goods. The higher the prices, while maintaining all other conditions, the lower the demand, and vice versa.
The elasticity of demand reflects the degree of sensitivity of demand for goods to changes in various factors (prices, people's incomes, etc.). If the demand for a product strongly depends on a change, for example, the price of it, then it is called elastic, if the price does not affect demand in any way, then it is called inelastic.
The types of elasticity of demand are distinguished:
1. Elasticity for the price. The coefficient of this indicator is calculated as the ratio of the percentage change in demand to the percentage change in price. When the price changes, demand can be elastic, inelastic or have a single indicator.
Such elasticity depends on the degree of necessity of the product, the number of substitute products and the time factor.
2. Income elasticity. The coefficient equals the ratio of the change in demand to the change (decrease or increase) in customer income as a percentage. It shows how much the volume of demand for goods changes with a change in consumer income by 1%. The coefficient can be positive and negative.
Depending on how the change in income affects demand, the following groups of goods are distinguished: the highest category (high-quality goods) - demand grows in proportion to income growth; lower category (cheap low-quality goods) - on the contrary; essential goods (their consumption is almost independent of changes in income).
3. Cross elasticity of demand. The coefficient of the indicator is determined by the ratio of the change in demand for a product of the form of one (X) to the change in demand for a product of another type (Y). If the coefficient is greater than one, then the goods are interchangeable, if less, then they are complementary; if it is equal to zero, then the goods are conjugate.
The elasticity of demand is influenced by a number of such factors:
- Time factor. If there is time to make a purchasing decision, the demand for the product becomes more elastic.
- Interchangeability. If the product has high-quality substitutes, then the elasticity of demand for it will always be high. For example, the demand for insulin will never be elastic, regardless of the price of it, because the medicine is vital for people with diabetes.
- The share that the goods occupy in the expenses of buyers. The larger it is, the more elastic the demand will be. With a uniform increase in prices, the consumer is more likely to refuse to buy a car than office supplies. Because pens are bought much more often.
- Advertising and marketing. The more recognizable a product is due to good advertising, packaging and other features, the more loyal to it is the consumer’s attitude and the less elastic demand for it.
- Luxury items or essentials. For the first group of goods (gold, jewelry, expensive cars), demand is always more elastic than for the second (products, household chemicals).
- Personal preferences and tastes of consumers also significantly affect the degree to which the elasticity of demand has.
Point elasticity of demand is an indicator measured at one point in the demand curve, which is constant along the entire line. This is an indicator of the sensitivity of demand to changes in any other indicators.
Thus, the elasticity of demand is the response of this indicator to changes in supply or other significant factors. Measured by coefficient of elasticity.