Define And Explain Elasticity Of Demand Essay Sample
Elasticity of demand is a key variation on the concept of demand. Essentially, elasticity of demand refers to the ability of price to influence demand. For instance, demand is said to be elastic if change in price influences demand. Inelastic demand, on the other hand, is where demand the influence of price on demand is small or null (Arnold 5).
How elastic demand is depend on the type of product. Elastic demand is common with, among other products, consumer durables. These are products that people purchase infrequently, such as automobiles and washing machines, among others. These products are mostly wants (needed for extra comfort and not that they address basic daily needs), so consumers can always postpone purchase if prices go up (Arnold 11). In this respect, automobile rebates have seen the sales of automobiles rise, owing to reducing prices.
Inelastic demands (that is, where changes in prices has no or small effect on demand) is common with necessities that people need nearly every day (Chaloupka 6). These include food and fuel. These are things that people need and have no choice but purchase. People need to eat every day. They cannot say they will wait until the prices fall. The same goes for fuel. People may still complain over the higher prices but they will still buy. The only thing that may change is a shift in preference. For example, people may go certain types of food (the relatively cheaper ones) more than others. But they do not stop buying food. Equally, consumers will not adopt new driving behavior because of higher gasoline prices.
One factor that makes the elasticity of demand behave differently with different types of products has to do with the availability of close substitutes; that is, the products that can do the same thing or serve the same needs (Chaloupka et al. 5). For this reason, even generally inelastic demand products may also be elastic, especially specific products within certain general groups. For example, there are various meat products: beef, poultry and pork, among others. The prices are never the same, but they can easily substitute each other. The changing prices of these products also affect the demand for other products. Poultry, for instance, is usually the most expensive. However, in recent year, poultry prices have been declining even as the prices of beef and pork continue to rise. As a result, more and more consumers are increasingly turning to poultry.
There is another type of elasticity- unitary elasticity (Arnold 17). This happens when demand and price change balance each other out. In other words, for example, every one percent price change results in a one percent demand change.
For economists, the formula for working out the elasticity of demand is:
(Q1-Q2 / (Q1+Q2)
(P1-P2) / (P1+P2)
Q1 is the quantity demanded before price change
Q2 is the quantity demanded after price change
P1 is the initial price
P2 is the price after change
If the formula results in a number greater than 1, it means that quantity changes faster than price. Therefore, the product has elastic demand. But if the formula results in a number less than 1, then it means price changes faster than quantity and, therefore, demand is inelastic.
The elasticity of a product’s demand may influence the setting of prices by businesses or persons dealing in the product.
Arnold, Roger. Economics. Cengage Learning, 2008. Print.
Chaloupka, Frank J., Grossman, Michael & Saffer, Henry. “The Effects of Price on
Alcohol Consumption and Alcohol-Related Problems”. Alcohol Research and Health, 2002. Print.