Price elasticity of demand: the formula for finding

The market is a relationship of buyers 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 making a profit. The buyer, before buying a good, evaluates a number of factors: price, availability of funds and the need for this product. Dependence of changes in the value of goods on consumer behavior determines the elasticity of demand for price. The formula shows how much the cause will affect the consequence of the situation.

Buyers' reaction to price changes

The intentions of a person to buy something, for example, through an online store, boil 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 chosen model at a price. As a rule, if the tablet is imported into the country under all customs rules, its cost for shopping will not be very different. Naturally, the buyer will choose that mobile computer, the price for which will be minimal.

The case considered is an example, named in microeconomics as "price elasticity of demand". The formula of this indicator characterizes how much more / less buyers will take the product, if the seller of the good changes the price.

The case with the tablet describes the elastic demand. Due to a large number of alternative mobile computers, a person will choose one whose value (within reasonable limits) is cheaper than the rest.

Lack of alternatives

Under this group of goods fall into several categories. The first are the benefits that can not be replaced, for example: salt, insulin, and to the second - luxury products: designer items in a single issue. Here are two boundary categories.

If the cost of a pack of salt increases, people will not stop buying it. After all, it not only gives a taste to dishes, but it is also a preservative, so in the war years its popularity was high.

The second non-alternative category is luxury goods. For example, a designer bag made of crocodile leather. It will be acquired by those people whose budget will not change from this purchase. These are high-yielding buyers, the price is not important to them.

In both cases, demand is determined as not elastic. And how will the buyer behave at a constant price for the benefit, but during the growth / decline of the personal budget? In this case, the elasticity of demand for income is considered, the formula of which determines a person's need for a particular product.

High and low quality goods

Above, examples were given of how a person's actions change when the value of a certain group of goods increases. But, in microeconomics, consider other factors (determinants) that affect the changing characteristics of the market - supply and demand. One such determinant is income.

This indicator - the elasticity of demand for income, the formula of which is expressed by the ratio of the reaction of demand for the goods to changes in the earnings of the buyer, is a litmus test in determining the quality of the good.

If the calculated indicator is less than 0, then the goods are considered to be of poor quality. In the range from 0 to 1 - the benefits, inelastic in income (fuel, food). The indicator above 0 characterizes the qualitative group of goods.

Types of demand by price

So, elasticity (E) is considered an indicator capable of describing how much the cause affects the investigation. 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 value. For this, the coefficient of elasticity of demand (formula) contains the ratio of two percent changes.

The value of elasticity is determined modulo.

• C fell by -1%, the 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%, the OP increased by 3%. E = 3 * -1 = -3. Elastic behavior of buyers;
• C fell by -1%, the OP increased by 1%. E = -1 * 1 = -1. Single (proportional) elasticity.

Who needs to know the type of demand?

The indicator - the elasticity of demand at a price, the formula of which is given above, is necessary for any activity aimed at making a profit. It does not matter whether an economic entity is engaged in the sale of goods or services. When he determines the price of the realized or his 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 original cost due to attracting a large number of customers.

In the long run, inelastic demand for good can become elastic. And another increase in the price of the product will result in losses for business. For example, gasoline. With the advent of alternative sources and electric vehicles, the demand for this type of fuel is decreasing. Now, in practice, it can be seen that the price of black gold per barrel fell to the level of prices thirty years ago. This is an example of how a product related to an inelastic form of demand for a price turned into an elastic one.

Therefore, price elasticity of demand - formula, calculation, indicators and analysis - is necessary for all economic entities.

Elasticity in practice: expression

And again an example. The cost of a pig's collar last year for a 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 rate of growth: (Ts2 - U1) / U1 * 100%.

It turns out: 600-500 / 500 * 100% = 20%.

If we record the same dependence on the volume, and then substitute the elasticity of demand for price in the expression, the formula will take the following form:

E = ((O2-Ob1) / (U2-U1)) * U1 / Ob1.

This expression has received such a name as the formula of the point elasticity of demand.

Elasticity in practice: graphic representation

Dependence of sales volume on the cost of goods is presented. At point A, the price of the good was equal to 80 rubles, and people during the period under review purchased 50 units of the goods. When the entrepreneur reduced the cost to 40 rubles, sales increased to 100 units. Substituting values in the formula of point elasticity, it turns out 2. So, the product is highly elastic and you can make a discount on it, in order to increase revenue. However, the above formula has drawbacks.

In the case of an example where the coordinate (initial) is the coordinate of B, and after increasing the price - point A, the elasticity is less than 1. That is, depending on whether you move from the coordinate A to B or vice versa, different values of the elasticity of demand . Therefore, economists, it was decided to replace the initial values of price (T1) and volume (Ob1) with the average arithmetic indicators. That is, U1 = U2 + U1 / 2, and About ₁ = About ₂ + About _1/2 . If we replace the second part of the expression of point elasticity with arithmetic mean values, we obtain the formula of arc elasticity of demand:

E = ((O2-Ob1) / (U2-U1)) * ((Ob2 + Ob1) / (U2 + U1)).

The value shows the average elasticity on the arc between the points with the coordinates A and B.

Interchangeable, complementary goods

When analyzing the behavior of buyers in relation to a certain commodity X, enterprise managers also take into account the change in the price of the commodity Y. For this, the instrument is a cross-elasticity of demand. The formula of the indicator is the ratio of the reaction of the demand for the commodity X to the change in the price of a certain commodity Y. Naturally, no one equates the behavior of buyers of dairy products with a change in the price of household chemicals. This applies to the interchangeable and mutually complementary categories of the good.

Distinguish the following goods according to their demand, depending on the price:

• Vital goods. For example, insulin. In this case, the demand is not at all elastic.
• Supplementing each other's goods: cream and coffee; Engine oil and cars. The elasticity is less than 1.
• For interchangeable goods is characterized by elastic demand, that is, more than 1. If the price of, for example, coffee with a hundred percent arabic content, people will start buying a drink with the addition of robusta. Then the 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.