Price elasticity of demand: characteristics and indicators
The main characteristic of demand is elasticity, which shows the buyer's reaction to the change in the price of the goods.
This indicator can be associated not only with changes in prices for goods, but also with a variation in the income of consumers. Thus, income elasticity and price elasticity of demand are different.
To understand the essence of the indicator, it is necessary to studythe buyer's behavior associated with price fluctuations. The reaction of a person to a change in the prices of goods can be weak, strong and neutral. Any case generates a corresponding demand, which can be single, elastic or inelastic. There may also be such options when the demand becomes completely inelastic or completely elastic.
The price elasticity of demand is quantitativecharacteristics and expressed in terms of the corresponding indicator. This is the coefficient of price elasticity of demand. It equals the ratio of the percentage change in sales volume to the percentage change in price. It turns out that demand is considered to be elastic even with its significant fluctuations, to which even insignificant price changes can lead. If the price is reduced by 1 percent, then the elasticity increases by a larger value.
You can consider an example. In the conditions of great competition, the company lost half of its customers, despite the fact that the price rose by only 5 percent. In this case, the coefficient of price elasticity is 10 (50% divided by 5%), and since it is greater than unity, the demand is elastic.
Knowing the law of demand and its elasticity, we can draw some conclusions.
A price increase can not guarantee an increase in sales revenue, and a decrease in the value of a product does not always lead to a drop in its value.
By setting a price for goods, any company must calculate what revenue it will receive, having this price, taking into account the existing elasticity of demand.
With a relatively low coefficient, the demand forproducts are considered inelastic. This happens when selling essential goods, when selling products for which it is difficult to find analogues. Inelasticity occurs when the goods are relatively inexpensive, as well as when the buyer is stalwart.
Minimum price elasticity of demand(inelasticity) means that buyers react sluggishly to price changes. The volume of the purchased goods increases by less than one percent for 1% of the price reduction of this product.
Intermediate number between inelastic andelastic demand is taken by the value of this indicator, equal to one. This situation can arise, for example, when a double increase in price leads to the same reduction in the volume of the goods purchased. At the same time, the total revenue from sales does not change.
It happens that in different situations the same type of product has different elasticity.
Knowing what the price elasticity of the demand isother goods, you can draw practical conclusions. After all, the price change can have different effects on the amount of total revenue. Thus, a decrease in cost with elastic demand leads to an increase in total revenue. It is proved that cheaper products stimulate buyers, and the gain, obtained from the increase in the number of sales, will more than compensate for the losses from the price reduction.
Everything happens vice versa with inelastic demand. Revenues and prices move in one direction. Reducing the latter reduces overall revenue, as it does not lead to a massive expansion of sales. And with the increase in value, revenue increases, as the gain from the rise in price of goods blocks losses due to a relatively low reduction in sales volumes.
A good example is the payment for public transport services. With its constant increase, inelastic demand is reduced by a negligible amount, and the revenue of transport workers is growing.