Elasticity of demand, or price elasticity, gauges how demand shifts with price changes, considering factors like product price and income.
What is the Elasticity of Demand?
Elasticity of demand measures the change in demand due to changes in factors such as price. It is the percentage change in quantity demanded divided by the percentage change in these variables.
Examples of Elasticity of Demand:
Here are some examples of elasticity of demand:
- Price Elasticity: If a watch's price drops from Rs. 600 to Rs. 500 per unit, and demand increases from 100 to 150 units, it shows how price changes affect demand.
- Income Elasticity: A government subsidy lowers wheat's price from Rs. 10/kg to Rs. 9/kg, increasing demand from 500 kg to 520 kg. It demonstrates how income changes influence the quantity demanded.
Types of Elasticity of Demand:
There are three main types of elasticity of demand:
- Price Elasticity: Measures the change in product demand due to price changes.
- Income Elasticity: Assesses the change in quantity demanded due to income changes.
- Cross Elasticity: Examines the change in demand for one product due to price changes in another related product.
Advantages of Understanding Elasticity of Demand:
- Pricing Optimization: High elasticity of demand can guide companies in pricing their products profitably.
- Taxation Considerations: Higher elasticity may result in lower taxes, as consumers are more price-sensitive.
- Sales Growth Potential: High elasticity products present opportunities for sales growth through pricing adjustments.
- Policy Formulation: Elasticity of demand is key to developing government policies, especially tax-related ones.
- International Trade: Price elasticity aids in determining export pricing in international trade.
Elasticity of demand provides a correlation between demand and price, aiding businesses in demand forecasting. It is influenced by product type and income levels, and impacts taxation, sales growth, government policies, and international trade. Understanding elasticity of demand can assist businesses in making strategic decisions.