elasticity of demand

Also found in: Dictionary, Thesaurus, Medical, Legal, Encyclopedia.
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


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 ?
The empirical findings indicate that the losses are strongly and positively determined by R&D and advertising intensities, confirming their role in differentiating products, and thus lowering the price elasticity of demand and enhancing oligopolistic pricing conduct.
Interestingly, if heteroskedasticity were a problem, it would bias the estimated price elasticity of demand toward 0.
It would also appear that if the income elasticity of demand for good 2 was larger than for good 1 the relative price of good 1 may decline.
The elasticity of demand for health care; A review of the literature and its application to the military health system.
Whether this increases total revenue, however, will depend on the price elasticity of demand for scratch-off tickets.
Because Equation (1) is in log-log form, the estimate of [delta] has been interpreted as the income elasticity of demand.
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.
The price and income elasticity of demand of natural gas in the US and parts of Canada, estimated in recent studies (e.
Investigating the Marshal-Lerner ConditionThe summation of elasticity of demand for export Ex and Import Mp in absolute terms is provided in Table 5.
costs, the relative volume of purchases, standardization of the product, and elasticity of demand.
Saying 'thank you' to loyal or prospective customers by offering discounts or additional benefits to them is the way in which businesses in other sectors operate, but the football industry appears to be burdened with too many poor business managers and a sense that supporters' elasticity of demand is exponential.