Demand Elasticity
Price elasticity of demand is a measurement of the change in the consumption of a product in relation to a change in its price. Expressed mathematically, it is:Economists use price elasticity to understand how supply and demand for a product change when its price changes. Like demand, supply also has an elasticity, known as price elasticity of supply. Price elasticity of supply refers to the relationship between change in supply and change in price. It’s calculated by dividing the percentage change in quantity supplied by the percentage change in price. Together, the two elasticities combine to determine what goods are produced at what prices.
Demand Elasticity
Definition
Demand elasticity measures the relationship between changes in the quantity consumed of a product and changes in its price. It reflects how sensitive consumers are to price changes. Mathematically, demand elasticity is usually expressed as the percentage change in quantity demanded divided by the percentage change in price.
Origin
The concept of demand elasticity was first introduced by 19th-century economist Alfred Marshall. He elaborated on this concept in his book 'Principles of Economics' and applied it to market analysis.
Categories and Characteristics
Demand elasticity can be categorized as follows:
- Perfectly Inelastic Demand: Quantity demanded is completely insensitive to price changes, with an elasticity coefficient of 0.
- Perfectly Elastic Demand: Any small change in price leads to an infinite change in quantity demanded, with an elasticity coefficient of infinity.
- Unit Elastic Demand: The percentage change in quantity demanded equals the percentage change in price, with an elasticity coefficient of 1.
- Elastic Demand: The percentage change in quantity demanded is greater than the percentage change in price, with an elasticity coefficient greater than 1.
- Inelastic Demand: The percentage change in quantity demanded is less than the percentage change in price, with an elasticity coefficient less than 1.
Specific Cases
Case 1: Suppose the price of a certain brand of coffee increases by 10%, leading to a 20% decrease in its sales. In this case, the demand elasticity is -2 (-20% / 10%), indicating that the demand for this brand of coffee is elastic.
Case 2: The price of a necessary medication increases by 15%, but its sales only decrease by 5%. In this case, the demand elasticity is -0.33 (-5% / 15%), indicating that the demand for this medication is inelastic.
Common Questions
Question 1: Why is demand elasticity important?
Answer: Demand elasticity helps businesses and governments understand the impact of price changes on consumer behavior, enabling them to formulate more effective pricing strategies and policies.
Question 2: Is demand elasticity always negative?
Answer: Yes, because price increases usually lead to a decrease in quantity demanded, and vice versa, demand elasticity is typically negative.
