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 ?
In fact, estimates of the price elasticity of demand for health insurance in the existing studies vary widely depending on the specific population studied, time frame, unit of analysis, data source, price measure, source of variation in the price measures, and the methods that are used for analysis.
Basket and Van (2008) calibrate the aggregate price elasticity of demand at Wal-Mart to be approximately -3.
Interestingly, at the state level, Gallet (2003) estimated the price elasticity of demand for cigarettes using the conjectural variation coefficient.
29) Second, we recalculate the price elasticity of demand for each of the 15 combinations of parameters as outlined above, replacing the point estimate of [partial derivative][Q.
We interpret the price elasticity of demand as the net response of customers of MTR were held constant over time.
KK] The particularly large difference between the long- and short-run elasticity estimates for imports suggests that the estimates of the direct price elasticity of demand for imports in the earlier study with a static model did not fully capture the total (long run) response of imports to their own price changes.
On the other hand, the very low short-run price elasticity of demand causes the value share to move in the same direction as the relative price: if the percentage increase in price is greater than the percentage decrease in quantity demanded, dollar spending as a share of income will rise when the price of energy goes up.
It is assumed that the price elasticity of demand for each factor is identical in every country and, for non-ICT factors, time-invariant.
At this level the student would be able to take the mathematical formula for price elasticity of demand and apply it to new data to calculate what the actual value is.
The price elasticity of demand for luxury goods, or goods with many substitutes, tends to be much higher (price elastic), so that the fall in quantity demanded will tend to be greater than the increase in price.
Since the price elasticity of demand is an increasing function of the number of firms in each case, by definition, each firm's markup will be a decreasing function of the firm number in the industry.
where [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] is the price elasticity of demand for [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] is the elasticity of demand for