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

or

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 ?
Some other product forms, such as food, are essential goods and see inelastic demand, while others, such as automobiles, are considered luxury items and face elastic demand. With fragile demand and increased competition in the industry across consumer product groups, many businesses are positioning themselves for expansion opportunities other than that of traditional markets of advanced global economies.
With this in mind, Infor CloudSuite EAM is designed to be scalable and dynamic as it is built on a platform with high uptime and is able to handle elastic demand.
Automation drove the price of cloth down, increasing the highly elastic demand, and resulting in net job growth despite the deployment of labor-saving technology."
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The inelasticity of imports and highly elastic demand for low value-addedexports is the reason why influencing imports and export price is not impacting the trade balance as much as we expect.
In this paper, we analyze how the parking searching time and parking fees affect the commuter's behavior and examine the efficiency of road toll and parking fee to improve the social surplus with elastic demand.
The demand curve of consumers without a gambling disorder (center) is modeled as a relatively large population, with more elastic demand (or high price sensitivity).
The SP survey also investigated the mode choice of residents according to four demand assumptions (rigid demand during peak hours, elastic demand during peak hours, rigid demand during off-peak hours, and elastic demand during off-peak hours) for travel distances of <1km, 1-3 km, 3-6 km, and >6 km.
Employees in abstract task-intensive jobs take advantage of information technology through a righteous mixture of powerful reciprocalities between repetitive and abstract undertakings (Nica and Potcovaru, 2015; 2014), elastic demand for services supplied by abstract task-intensive jobs, and inelastic labor supply to these jobs in the short and medium run.
The estimated coefficients depict an income elastic demand for oil in Bahrain, Kuwait, Oman and Saudi Arabia.
What of case (a), a situation of perfect competition where there is a perfectly elastic demand curve?
The results seem to support a nearly elastic demand for a significant proportion of football clubs (Spanish Football League).