Elasticity is ... The concept and types of elasticity. Elasticity of supply and demand

Elasticity is the level of reaction of one economic variable, while the other is changing. In other words, elasticity is the dependence of supply and demand on goods from various price and non-price factors.

Basic moments

Dependence of such indicators as demand and supply, is in many factors. The term elasticity is also associated with it.

In the theory of economics, the concepts of elasticity of supply and demand are singled out.

The elasticity of demand for goods is the percentage of changes in prices or income with a change in demand. It exists to control how the consumer reacts to rising and falling prices.

In economic theory, there are several types of elasticity of demand for price, based on the coefficients:

• Elastic demand (more than one). It includes goods belonging to the category of luxury.
• Inelastic demand (less than one). This category of essentials.
• Demand with unit elasticity (equal to one). This includes products that the consumer selects individually.
• Absolutely inelastic demand (equal to zero). Such goods as bread, salt, medicines.
• Absolutely elastic demand (equal to infinity). There is only in the conditions of perfect markets.

The elasticity of the price proposal is the percentage of changes in prices with a change in the supply level. This indicator is influenced by such factors:

• Presence / absence of the production reserve (in the event that there are reserves, the offer is elastic).
• The ability to store stocks of finished products (if so, the offer is elastic).

Main types:

• Elastic offer. Even with a one-percent increase in prices, the supply of goods is significantly increased.
• A sentence with unit elasticity. With a one-percent increase in prices, a similar increase in supply occurs on the market.
• Inelastic offer. When the price increases with the offer, nothing happens.
• Elasticity "in a moment". The time period is so small that producers and sellers do not have time to react to price changes.

High elasticity in the long term. The offer is the most elastic, because the producers have enough time to create new production capacities or speed up the production process.

Analyzing the supply and demand, it is possible to identify the main directions in the changes of these concepts associated with price or non-price factors. Due to this, the law of supply and demand was formulated. Often, researchers are not enough data that the rise in prices entails a decrease in the volume of demand for products. They need accurate quantification, because volume reduction is fast, slow, weak or strong.

Market sensitivity relative to pricing policy, revenues or other indicators of the market is reflected in the elasticity indicators, which are characterized by a special coefficient.

Historical reference

The concept of elasticity in the theory of economics appeared late, but it immediately became one of the fundamental. The general term came to the economy from the natural sciences. Robert Boyle in the seventeenth century, while studying the properties of gas, first used the term "elasticity". But the economic definition was given by Alfred Marshall only in 1885. English scientists have not invented this concept. Using the achievements of A. Smith and D. Ricardo, he gave the first clear definition of the coefficient of price elasticity of demand.

To date, there is no single section of the economy in which the term "elasticity" would not be used. Here, and analysis of demand with supply, the theory of firms and economic cycles, international economic relations, economic expectations and others. Elasticity is the term without which the existence of a modern economy is impossible.

Classification of elasticity

The types of this economic term are:

• Price elasticity of demand;
• Price elasticity of offer;
• Income elasticity of demand;
• Cross elasticity of demand for price;
• Point elasticity of demand;
• Arc elasticity of demand;
• The elasticity of a straight line;
• The elasticity of technical substitution;
• Elasticity of price and salary ratios.

Point elasticity is a constant value along the lines of supply and demand. It is measured at one point, hence the name of the term. Point elasticity is an objective indicator of the sensitivity of demand and supply to changes in prices or revenues.

Arc elasticity is an approximate level of reaction. It does not give exact data (as opposed to a dotted one). The arc elasticity of demand is the average indicator of demand and supply for changes in prices or income of the population. It is necessary in order to quickly assess the overall situation on the market.

Coefficient of elasticity

The value of the income elasticity coefficient is responsible for the degree of quantitative changes of one factor (volume of demand or supply), while the other (price, income or costs) changes by one percent.

The elasticity of supply and demand is calculated as the ratio of the change in the level of demand (supply) to a change in any determinant in percent. The determinant is a factor that affects supply and demand. The value of the coefficient of elasticity depends on the determinants.

A variety of goods differ from each other in the degree of change in the level of demand under the influence of certain factors. The degree to which demand for these products responds is quantifiable by the coefficient. The change in the elasticity of demand affects the situation on the market as a whole.

This term means the process of adapting the market system to a change in the main factors. These include the price of the product, the income of the buyer and the price of the analogue product.

Counting methods

The coefficient of income elasticity is calculated in several ways. When calculating, there are two main methods:

• Arc elasticity or elasticity along the arc. It is used to measure the elasticity between points on the demand and supply curves. It implies knowledge of the initial and next level of price and volume.
• Point elasticity or elasticity at a point. It is used in the case when there is data on the functions of demand (supply) and the initial price levels, as well as the quantities of demand (supply). This formula applies to a slight change in price or any other parameter.

Basic properties

Based on the definition of functions and formulas, such properties of elasticity follow:

• Elasticity is an immeasurable quantity, depending on units, which measure volume, price or other parameters;
• The elasticity of the reciprocal functions are reciprocal quantities.

There are three main variants of the dependence of price fluctuations on the market on the volumes of demand:

1. Inelastic demand. It occurs when the quantity of the purchased goods rises less than one percent, at every percent of the price reduction.
2. With the increase in purchased products by more than one percent and a decline in the price of a percent, demand becomes elastic.
3. The notion of a single elasticity appears when the quantity of products increases twofold due to a drop in its price by half.

Factors of elasticity of demand

• The time factor (for a long-term period there is a more elastic demand).
• The availability or availability of analog goods (if they do not exist, then the risk of reducing demand is minimal).
• Part of the cost of products, which is embedded in the consumer budget.
• The level of saturation of the market with products.
• Possibilities of using products.
• Importance of this product for the consumer.

Factors of inelasticity of demand

Consider those moments that are directly influenced by the consumer:

• He prefers goods with good characteristics (the demand is inelastic at a price if the product does not work or deceives the customer's expectations);
• The consumer often orders the goods to the manufacturer (in this case he is ready to pay more);
• Buyers may not be sufficiently informed about a particular product;
• The price of the goods is low in comparison with the budget of consumers;
• The buyer has the opportunity to save on a certain type of goods.

Elasticity of demand by income

It is defined as the level of quantitative changes in incomes per each percent. The growth of incomes increases the possibility of making purchases, the demand also increases, and the elasticity of demand is positive.

If the coefficient of elasticity is insignificant (more than zero, but less than one), then it is a matter of essential production. If it is above unity, then these are luxury items.

As for goods of the lowest quality, then the elasticity of demand for income will be negative (less than zero). Elasticity is an indicator that is constantly changing depending on the situation on the market.

Cross-elasticity of demand

This coefficient shows the level of change in demand for one product, while the price for the other changes by one percent. It is positive, negative and zero.

If the coefficient is greater than zero, then the product is interchangeable, if less, then the goods complement each other. In the event that the coefficient of cross-elasticity of demand is zero, the goods do not depend on each other and do not have any effect on demand.

The main factor of cross-elasticity of different products is consumer properties of goods, their replacement or addition.

One of the most common phenomena in the market is the elasticity of the product. The cross has an asymmetrical character: one product depends on another.

Researchers identify difficulties in determining the boundaries of industries using the coefficient of cross elasticity. These include the following factors:

1. It is difficult to determine the permissible high level of cross-elasticity in certain industries. For example, the cross-elasticity of frozen vegetables of one firm is very high, but the products from ready-made dough and frozen vegetables are quite low. Accordingly, it remains unclear whether it is necessary to talk about the two industries or about each separately.
2. A chain for cross-elasticity (for example, high cross-elasticity will be observed between color and black and white TVs).

Elasticity of supply

The coefficient of price elasticity of supply is the level of its quantitative changes, while the price changes by one percent.

The degree of supply volume transformation, depending on the changed prices, is the elasticity of supply by price. The measure for this change is the elasticity of supply, which is calculated as the ratio of volumes to the increase in prices.

Factors that determine the elasticity of supply at a price:

• Time frame (instant - inelastic, short-term - adapted to the changing price, long-term - elastic);
• The possibility of long-term storage of finished goods and raw materials purchased for their production;
• Specificity of production work (the amount of work spent on manufacturing products);
• The maximum volume of production provided that the capacity is fully loaded.

The elasticity of supply at a price varies due to the impact of technological progress, the quality and quantity of raw materials and other resources expended.

To reduce the elasticity of supply offers increased scarcity of raw materials, which is used in production.

Conclusion

Elasticity is the level of response of economic indicators to each other.

The functions of supply and demand depend on a large number of price and non-price factors (determinant).

The elasticity of the supply and demand function is characterized by the sensitivity of the supply and demand indicators to the changes in a certain percentage factor. In order to establish the elasticity at a particular point, it is necessary to find the partial derivative function of supply and demand for a particular determinant.