Economic indicators such as demand, supply and price are among the main elements of the market. It is their interaction that forms the market mechanism, which can be represented in the form of a union of sellers and buyers to form the demand and supply of goods.
So, demand is determined by a certain amount of products, for the purchase of which each specific buyer has his own price from similar indicators for a certain period of time. The main points in this definition are: the presence of a specific price scale and a specific time period. Due to price changes, demand is changing. It is this formulation that determines the law of demand.
A proposal can be presented in the form of a certain amount of products that a business entity is ready to produce for further sale at a certain price from a specific price range in a certain time period.
The existing law of supply is able to show a direct relationship between changes in supply and price. In other words, rather high prices make the manufacturer offer their products more, and low prices, on the contrary, less. When deciding on the production of specific products, the business entity is required to constantly compare the price per unit of goods with its cost.
The term “price and demand elasticity of supply” is directly related to the demand for certain goods, depending on their price level. That is why the price elasticity of supply and demand shows the degree of dependence of consumers on price changes. To measure it, the corresponding coefficient is used.
The elasticity coefficient can show how many percent the demand for the product will change if its price changes by 1 percent.
The elasticity of supply and demand can be calculated by the following formula:
Ep = (-ΔQd (%)) / (ΔP (%)),
where Ep is the elasticity of supply and demand in relation to price;
∆Qd - change in demand or supply (relative value in percent);
∆P - price change (relative value in percent).
If relative values are presented in the form of corresponding formulas, then the elasticity of supply and demand can be calculated as follows:
Ep = ((Q1 - Q0) / (Q1 + Q0)): ((P1 - P0) / (P1 + P0)),
where Q1, Q0 - supply or demand before and after the price change;
P1, P0 - price taken also before and after the change.
With increasing prices, demand gradually decreases. To avoid negative values in the specified formula, the coefficient value must be taken modulo.
With the elasticity of supply and demand, greater than one, the increase and decline in demand or supply occurs faster than price. The value of this coefficient less than unity means the inelasticity of demand, in which the fall or growth of demand and supply is slower than the change in price.
A coefficient equal to one is an ideal option for any economy, characterizing the general balance of all economic processes in the state.
Also in theoretical studies there are the concepts of “absolute inelasticity” (in the event that changes in price do not entail any changes in demand or supply, the coefficient is 0), and “absolute elasticity of supply and demand” (with a fairly small change in price, demand and sentence extends to infinity).
A consideration of the coefficient of elasticity would be incomplete if we did not pay attention to factors that influence the elasticity of supply and demand, namely:
- the existence of analogues (the more substitutes for the original product, the more elastic the demand for it);
- the specific gravity of the consumed goods (the lower the specific gravity, the lower the elasticity of supply and demand);
- value of income;
- category of goods (whether it refers to luxury goods - demand is elastic, or to basic necessities - demand is inelastic).