Demand Elasticity

Elasticity of Demand

Introduction

The concepts of supply and demand are very important for businesses as well as for individuals. Every person has certain demands in his life which he wants to be supplied with. There are different concepts which are associated with the demand and supply, for instance elasticity of demand, price and income elasticity and coefficients of them etc. All these concepts are described under the discussion section.

Discussion

Elasticity of Demand

It is amongst the most important concepts in economics. It can be easily described as the extent to which the demand of a service of product fluctuates (Mankiw N. G., 2001, p. 90). Elasticity of demand can be unitary, inelastic or elastic. It has been noticed that the demand for products which are considered as specialized products, like cars and electrical appliances etc, face elasticity. They face changes in demand on the basis of fluctuation in price. On the contrary those products and services which are essential and necessities for life face inelasticity. They don't have impact of change in pricing.

Cross Price Elasticity

It is mostly seen that if one product's price changes there is a change in the demand of another product. This affect is caused by cross price elasticity (Braeutigam R. & Besanko D., 2010, p. 52). The change in price of a substitute product causes the increase in purchasing of other product. On the other hand, it can also be noticed that if a product's price is increased, then the demand of its complement product faces downfall.

Income Elasticity

Income affects the buying pattern of individuals. Income elasticity can be defined as the relationship between change in real income and change in quantity of product demanded (Mak J., 2004, p. 26). It has been observed that normal goods have positive income elasticity of demand as compared to inferior goods. Normal goods are those products the consumption of which is directly proportional to the consumer's income. Hence, consumption of normal goods like clothes will invariably increase with a rise in consumer income and vice versa. On the other hand, the consumption of inferior goods such as used books is inversely proportional to the income of consumers. Therefore, consumption of inferior goods decreases with a rise in consumer income and vice versa.

Coefficient of Elasticity of Demand

It is described as the relationship caused by the change of percentage between two variables. It can be the change in price and the change in quantity of the product demanded.

Coefficient of Price Elasticity

The coefficient of price elasticity of demand is the relationship between the change in price of the product and its quantity demanded.

Coefficient of Income Elasticity

The coefficient of income elasticity can be defined as the change between the quantity of the product demanded and the change in income of any individual.

Cross-price Elasticity of Demand

Cross-price elasticity determines whether goods are complements or substitutes. It measures the responsiveness of quantity demanded in relation to price changes in other goods.

In the case of substitute goods, a price increase in product X would stimulate consumers to purchase more ...