The market is a relationshipbuyers and sellers. In microeconomics, their behavior is characterized by supply and demand, respectively. In business, it is important to know the evaluation of both indicators for profit. The buyer also before the acquisition of the good evaluates a number of factors: price, availability of funds and the need for this product. The dependence of the change in the value of goods on consumer behavior determines the elasticity of demand for price. The formula shows how the cause will affect the outcome of the situation.
Customer reaction to price changes
The intentions of a person to buy something, for example,through the online store, they come down to the fact that he, having decided on a specific product (let it be a tablet), refers to specific sites in order to sort the selected model by price. As a rule, if the tablet is brought into the country according to all customs rules, then its cost for shopping will not be much different. Naturally, the buyer will choose the mobile computer, the price of which will be minimal.
The considered case is an example,nicknamed in microeconomics as “price elasticity of demand”. The formula for this indicator describes how much more / fewer buyers will take the goods if the good seller changes the price.
The tablet case describes the elastic demand. Due to the large number of alternative mobile computers, a person will choose the one that is (reasonably) cheaper than the rest.
Lack of alternatives
Under this group of products fall severalcategories. The first includes benefits that cannot be replaced with anything, for example: salt, insulin, and the second - luxury products: designer items in a single release. These are the two boundary categories.
If the cost of a packet of salt increases, people will not stop buying it. After all, it not only adds flavor to dishes, but is also a preservative, therefore its popularity was high in the war years.
The second non-alternative category is goods.luxury class. For example, a designer bag made of crocodile leather. It will be acquired by those people whose budget does not practically change from this purchase. These are highly profitable buyers, the price is not important to them.
In both cases, demand is determined by how notelastic. And how will the buyer behave at the same price for the good, but during the growth / decline of the personal budget? In this case, the elasticity of demand for income is considered, the formula for which determines a person’s need for a particular product.
High and low quality goods
The above are examples of how actions change.human, when the cost of a certain group of goods increases. But, in microeconomics, other factors (determinants) are also considered that affect the change in the characteristics of the market — supply and demand. One such determinant is income.
This indicator is the elasticity of demand byincome, the formula of which is expressed by the ratio of the demand response to a commodity to the change in the buyer's earnings, is a litmus test in determining the quality of the good.
If the calculated indicator is less than 0, thenProducts are considered of poor quality. In the range from 0 to 1 - benefits, inelastic income (fuel, food). The indicator above 0 characterizes the quality group of goods.
Kinds of demand by price
So, elasticity (E) is considered an indicatorable to describe how the cause affects the effect. But how to express it? For example, comparing two products - milk and jamon, it is impossible to compare the consequences, if the price of two goods is increased by 20 rubles. The increase in the price of milk will be more noticeable from its original cost. For this, the coefficient of elasticity of demand (formula) contains the ratio of two percent changes.
The value of elasticity is determined by the module.
- C fell by -1%, OP increased by 0.5%. The elasticity of demand under this condition: E = 0.5 * -1 = -0.5. The indicator is below 1, then the demand is inelastic.
- C fell by -1%, OP increased by 3%. E = 3 * -1 = -3. Elastic behavior of buyers;
- C fell by -1%, OP increased by 1%. E = -1 * 1 = -1. Single (proportional) elasticity.
Who is important to know the type of demand?
Indicator - price elasticity of demand, formulawhich is shown above, is necessary for any activity aimed at making a profit. It doesn’t matter if the business entity sells goods or services. When it determines the price of a realized or own produced goods, the main condition is effective sales. For example, for goods of elastic type, you can create a condition associated with a price reduction. At the same time, revenue will increase several times relative to the initial cost due to the attraction of a large number of buyers.
In the long run, inelastic demand forbenefit can become elastic. And the next increase in the price of goods will result in losses for the business. For example, gasoline. With the advent of alternative sources and electric vehicles, the demand for this type of fuel decreases. Now in practice it can be seen that the price of black gold per barrel has fallen to the level of prices thirty years ago. This is an example of how a product related to the inelastic type of demand for price has become elastic.
Therefore, price elasticity of demand - the formula, calculation, indicators and analysis - are necessary for all economic entities.
Elasticity in practice: expression
And again an example.The cost of a pork collar last year per kilogram was 500 rubles, this year it costs 600 rubles. How to determine the percentage change in price? For this, there is a formula for the growth rate: (C2 - C1) / C1 * 100%.
It turns out: 600-500 / 500 * 100% = 20%.
If we write the same dependence in terms of volume, and then substitute the expression of price elasticity of demand, the formula will take the following form:
E = ((Ob2-Ob1) / (Ts2-Ts1)) * Ts1 / Ob1.
This expression has received such a name as the formula of point elasticity of demand.
Elasticity in practice: graphic image
Presents the dependence of sales fromcost of goods. At point A, the price of the good was 80 rubles, and people in the period under review purchased 50 units of goods. When an entrepreneur reduced the cost to 40 rubles, sales increased to 100 units. Substituting the values in the formula of point elasticity, it turns out 2. It means that the product is highly elastic and you can make a discount on it in order to increase revenue. However, the above formula has flaws.
In the case of an example where the point of reference(initial) will be coordinate B, and after the price increases - point A, the elasticity is less than 1. That is, depending on whether you move from coordinate A to B or vice versa, different values of demand elasticity are obtained. Therefore, economists, it was decided to replace the original values of the price (C1) and volume (Ob1) with arithmetic averages. That is, t1= C2+ C1/ 2, and About1= About2+ About1/ 2. If we replace the second part of the expression of point elasticity with arithmetic mean values, we get the formula for arc elasticity of demand:
E = ((Ob2-Ob1) / (Ts2-Ts1)) * ((Ob2 + Ob1) / (Ts2 + Ts1)).
The values show the averaged elasticity on the arc between the points with coordinates A and B.
Interchangeable, complementary benefits
When analyzing the behavior of customers in relation toSome product X managers of enterprises also take into account the change in the price of goods U. For this, the tool is the cross elasticity of demand. The formula of the indicator is the ratio of the reaction of demand for product X to a change in the price of some product Y. Naturally, no one equates the behavior of dairy product buyers to the change in the price of household chemicals. This applies to interchangeable and complementary categories of benefits.
The following products are distinguished according to their demand depending on the price:
- Vital items. For example, insulin. In this case, the demand is not elastic at all.
- Complementary benefits: cream and coffee; motor oil and cars. Elasticity less than 1.
- For interchangeable goods characteristicelastic demand, that is, more than 1. If, for example, coffee with one hundred percent Arabica content is more expensive, people will start to buy a drink with the addition of Robusta. Then sales of the first will be reduced.
These formulas are used by firms to analyze their pricing policy, and the state - in the fiscal service and employment.
