elasticity of demand

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Related to Demand elasticity: Price elasticity of demand, Supply Elasticity

Elasticity of demand

The degree of buyers' responsiveness to price changes. Elasticity is measured as the percent change in quantity divided by the percent change in price. A large value (greater than 1) of elasticity indicates sensitivity of demand to price, e.g., luxury goods, where a rise in price causes a decrease in demand. Goods with a small value of elasticity (less than 1) have a demand that is insensitive to price, e.g., food, where a rise in price has little or no effect on the quantity demanded by buyers.

Elasticity of Demand

The relative stability of a security's or product's price in the face of increased or decreased demand. Elastic securities or products have prices that move as independently as possible from changes in demand. In securities, elasticity is strongly influenced by the number of shares outstanding; if a company has many shares outstanding, a large order to buy or sell them is less likely to affect the price as strongly as a similar order for a company with comparatively few shares outstanding. In other products, elasticity largely comes from whether a given product is considered a necessity or a luxury. A "necessary" product is likely to be more elastic. See also: Income Elasticity of Demand.

elasticity of demand

a measure of the degree of responsiveness of DEMAND for a product to a given change in some economic variable, particularly its own price, the prices of competing products and consumers' income. In general terms, if there is a more than proportionate change in quantity demanded as a result of a change in a variable, then demand is said to be elastic, while if there is a less than proportionate change, then demand is inelastic. Price elasticity of demand is calculated using the formula:

which measures the effect on demand of an increase or decrease in the product's own price. Since the price-quantity demanded relationship determines the firm's total revenue from selling the product, the price elasticity of demand figure thus provides an indication of the way in which a change in price will affect the firm's revenues. For example, if, as in the case of cigarettes as a generic group in the UK, demand is highly inelastic (econometric studies put it at 0.32), then an increase in cigarette prices will increase total industry revenues more than proportionately. However, it is important to note that the demand for each of the many individual brands making up the market is likely to be much more elastic because they face competitive substitutes within the market (i.e. putting up the price of a particular brand is likely to result in buyers switching to other brands, and hence reduce the firm's revenues). The extent to which the demand for a brand is affected by a change in the price of a close substitute brand can be measured by the cross-elasticity of demand formula:

% change in quantity demanded of brand A % change in price of brand B

There are various practical difficulties, however, in the way of measuring elasticity values. For example, there is usually insufficient data available to construct a comprehensive ‘demand curve’ covering a wide range of price-quantity demanded combinations, and to isolate individual brand cross-elasticity effects in a multi-brand setting. See DEMAND-BASED PRICING.

Income elasticity of demand measures the degree of responsiveness of demand for a product to changes in consumers' income over time, namely:

The concept of income elasticity of demand is useful to corporate planners in indicating which industries are likely to decline or expand over time as income levels rise, and hence can make an important contribution to the formulation of a firm's DIVERSIFICATION and DIVESTMENT strategies. See PRICE DISCRIMINATION.

elasticity of demand


demand elasticity

a measure of the degree of responsiveness of quantity demanded of a particular product (see DEMAND) to a given change in one of the INDEPENDENT VARIABLES that affect demand for that product. The responsiveness of demand to a change in price is referred to as PRICE-ELASTICITY OF DEMAND; the responsiveness of demand to a change in income is known as INCOME-ELASTICITY OF DEMAND; and the responsiveness of demand for a particular product to changes in the prices of other related products is called CROSS-ELASTICITY OF DEMAND.
References in periodicals archive ?
Finally, the present study suggests that the HPT may be a viable solution to real-world problems for which actual price ranges are insufficient in detecting demand elasticity.
We now consider the significance of aggregate demand elasticity for the balance of trade when an economic expansion results from an increase of aggregate supply.
The elasticities are slightly lower than recent findings by DEWENTER & HAUCAP (2007) on the demand elasticity on the Austrian mobile market.
When the latter component is accounted for, the gross price elasticity of medical care is no longer equivalent to the cost-sharing demand elasticity.
The demand elasticity with respect to wholesale price of Basmati at Lahore was -0.
Similarly, for supply chain managers, the demand elasticity for transportation services is influenced not only by freight transport costs but also by the relative costs of other production inputs, such as warehousing.
For example, if a 1 per cent rise in Australia's export prices were to cause the rest of the world to reduce its demand for Australian goods by 4 per cent, the export demand elasticity is -4.
First, demand elasticity, which put simply means that if prices rise demand falls.
Restricting our analysis to the case where market demand is elastic, we find that ad valorem taxation Pareto dominance is more likely the smaller the within-market elasticity of substitution or the larger the market demand elasticity.
APPENDIX GAMS code for simulating the congesting pricing example set s simulation iterations /1*1000/, l supply elasticity level /low, med, high/, d demand elasticity level /low, med, high/; parameter c congestion indicator (speed mph), n traffic flow demand (number of road users), p user price (social marginal cost) beta the speed demand elasticity theta(l) supply speed-flow elasticity /low 0.
69 depending on the marginal cost of providing service and the estimate of the demand elasticity one uses.
In its survey ERS also found that larger slaughter plants have much higher safety ratings than smaller ones, leading researchers to conclude that market conditions including size and demand elasticity, push large firms to innovate.