elasticity of demand


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Related to elasticity of demand: Elasticity of supply, Income elasticity of demand

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 ?
We conducted one-way sensitivity analyses to find the threshold values for the percentage increase in price, percentage increase in quantity demanded, and own-price elasticity of demand that would result in no change in total naloxone sales following OTC.
"The Elasticity of Demand for Health Care: A Review of the Literature and Its Application to the Military Health System." RAND Working Paper.
The model shows that the demand for health care services will increase with an increase in the price of visits when the cross price elasticity of demand for visit intensity outweighs the own price elasticity of visits.
The resulting estimates of price elasticity of demand are in conformity with the existing research results, from the aspect of competition between the high-speed railway and other transport modes [14,16].
Little appears in the literature on the elasticity of demand for scratch-offs or other quick-play games in response to either jackpot size or design of payout structure.
Because Equation (1) is in log-log form, the estimate of [delta] has been interpreted as the income elasticity of demand. Notice that Equation (1) is simply a monotonic transformation of
Bird (1982) explained the price elasticity of demand in football in terms of both admission and travel costs, although admission cost variables are considered more important.
The estimated price elasticity of demand for Germany's import of geranium oil indicates that 1% decline in average import price leads to raising its total demand for geranium oil by 1.81%.
While empirical evidence suggests that the elasticity of demand for oil ([[member of].sup.a]) is less than one, this does not necessarily guarantee that country o's oil export revenues will rise when [P.sub.o] rises.
The price and income elasticity of demand of natural gas in the US and parts of Canada, estimated in recent studies (e.g.
when change in prices and quantities move away from equilibrium, due to lesser elasticity of demand than elasticity of supply.