elasticity of demand

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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 ?
A water&energy smart grid for irrigation: allowing interactive energy use decisions, by introducing demand-side management and matching the consumption to the available energy offer, due to existing water storage capability (in reservoirs or in the soil) that enables an near-almost elastic demand.
Zeineldin says the service should appeal to any company that has an elastic demand for computing power, across a range of industries, and he believes that will also offer companies a convenient way to test out cloud computing.
To the best of our knowledge, there has not been a credible estimate that showed an elastic demand for crude oil in the world market since the first energy crises in 1973.
The NECC has claimed that APD has a greater impact on connections to regional airports because these flights carry fewer passengers and have less elastic demand than major hubs.
The letter to Mr Hammond MP claims APD has a greater impact on connections to regional airports because these flights carry fewer passengers and have less elastic demand than major hubs.
First, one must realize that some people may have elastic demand schedules for the monopolized product above the free market price.
In the cartel model, each cartel member perceives two demand curves: a less elastic demand curve jointly faced by cartel members when they maintain their collusive behavior, and a more elastic demand curve perceived by an individual entrepreneur who is alert to new opportunities for making gains by acting alone.
They are classified as high, unit and low elastic demand.
i) In general, students would be expected to have a more price elastic demand for theatre tickets than other (income-earning) attenders.
Even groups with the most elastic demand curves have demand curves that are far from flat.
It is easy to see, ceteris paribus, that the relatively elastic demand curve results in a greater DWL than the relatively inelastic labor demand curve (the area of ABC > area of AEC) even for a given unemployment rate.
Unfortunately the pulp and paper industry has evolved to such a construct that it suffers from circumstances which involve relatively inelastic supply side scenarios coupled with relatively elastic demand conditions.