How to determine the coefficient of elasticity of demand

The elasticity of demand allows you to determine the change in customer demand with a change in any factor affecting their choice. The most significant determinants that determine demand is the price of the goods.

Instruction manual

1

The elasticity of demand by price shows the degree of quantitative change in demand when the price changes by 1%. It is calculated as a percentage of the change in demand to the change in the market price of a product.

2

The dependence of demand on prices can be expressed in different ways. If the price of a product is reduced by one percent, and the purchased quantity of the product increases at a slower pace, then they speak of inelastic demand. With elastic demand, while reducing the price of a product by 1%, demand for it increases at the fastest pace. With a single elasticity, when the price is halved, demand also doubles, i.e. the rate of decline in price and the growth rate of demand are the same. If demand is absolutely not elastic, then any change in price does not affect the volume of demand.

3

The price elasticity of demand is determined by several factors. It is affected by the availability of substitute products on the market. The more of them, the more elastic the demand. These products include food products. But, for salt, which has almost no substitutes, the demand is inelastic. In addition, elasticity depends on the share of consumer income attributable to this product. The higher it is, the greater the elasticity. The elasticity of demand also depends on the degree of need for a given product for a buyer, the variety of possibilities for using the purchased product, and the time it takes to adapt to price changes.

4

There is also a price cross-elasticity factor. It shows the relative change in the volume of demand for one product when the price changes for another. If this coefficient is above zero, then there is interchangeability of goods, i.e. with an increase in the price of one product, demand for another increases. For example, with rising prices for potatoes, demand for pasta will increase.

5

If the coefficient of elasticity is greater than zero, then we speak of the complementarity of goods, i.e. as the price of one product rises, demand for another falls. For example, with rising gas prices, demand for cars decreases. If the coefficient of elasticity is zero, the goods are independent, i.e. an increase in the price of one product does not affect the level of demand for another.