How to find the elasticity of demand

Consumer demand determines the supply of goods, since it is their own needs that encourage buyers to pay. The dynamics of this phenomenon is determined by many factors, therefore, with any changes, it is necessary to find the elasticity of demand.

Instruction manual

1

There is a well-known phrase “Demand creates supply”, which in three words reflects the market relations of producer / consumer. The more the buyer requires, relying on fashion trends, the desire to follow progress, his own aesthetic and physical needs, etc., the greater the volume of production the enterprise produces. And vice versa, as soon as demand falls, manufacturing companies try to switch to another product or completely change the range.

2

To monitor changes in demand and calculate them in advance, you need to quickly conduct an economic analysis, in particular, calculate elasticity. Distinguish the elasticity of demand by price, income, as well as cross elasticity.

3

There are several factors that influence the decision of manufacturers to raise or lower the price. This is the appearance or disappearance of competing goods or substitutes, the change of seasons (food, clothing, sports accessories, etc.), shelf life, etc. The price elasticity of demand is calculated in the form of coefficients in two ways: point and arc.

4

The point method involves knowing the price of the beginning of the period and the demand function, as well as the rules of differentiation. The elasticity coefficient is equal to the mathematical relation between two quantities: E = F '(x) • x / F (x), where: x is the price; F (x) is the demand function by price; F' (x) is the first derivative of the demand function.

5

Arc elasticity can be found only if you have at your disposal data on prices of the initial and final period and the corresponding volumes of production. On the graph of the demand function, you will see an arc limited by these values, hence the name. So, the arc elasticity formula is as follows: E = (V2 - V1) / ((V2 + V1) / 2): (P2 - P1) / ((P2 + P1) / 2), where: V1 and V2 are volumes products at the beginning and end of the arc; P1 and P2 are the initial and final prices.

6

The elasticity of income is determined not by prices, but by the income of the buyer. This value depends on the level of wealth, the degree of need (luxury or necessities), etc. This elasticity indicator is determined by the ratio of the volume of goods and income: E = (V2 - V1) / ((V2 + V1) / 2): (D2 - D1) / ((D2 + D1) / 2), where: D1 and D2 - income at the beginning and end of the billing period.

7

It is difficult to find a unique product on the market. As a rule, everyone has an analogue or a complementary product closely related to it. For example, butter and margarine are used interchangeably, and a computer and a computer mouse are complementary. A change in the price of one of these products will inevitably affect the demand of the other, this is called cross elasticity: E = ∆V / ∆P • P / V, where: P is the unit price of one product; V is the volume of demand of the second product.