Concept of Elasticity of Demand and Supply
The report brings out the discussion on the impact of concept of elasticity of demand and supply on individuals. Demand refers to the customers “need” or “desire” of a given product or the type of the product and their willingness to purchase the product. The report highlights that how all the concepts related to the elasticity of demand and supply is related to individual preferences. The concepts acknowledged were study of price elasticity, income elasticity, and the cross elasticity. The cross elasticity covers the study and impact of substitute goods and complementary goods on the buying behaviour of individual customers. Moreover, the elasticity has different degrees according to the responsiveness of one variable in response to another variable (Pagoulatos, and Sorensen, 2017).
Elasticity refers to the change in price, which may or may not affect the supply and demand of goods and services. The concept of elasticity actually measures the responsiveness of quantity demanded of a product to the change in price. The same concept goes with supply also where the responsiveness of the quantity supplied is of a product to the change in price is measured. The degree of responsiveness is classified into various ranges from elastic demand to inelastic demand and unitary demand (Hursh, and Roma, 2016). The elasticity of demand shows the extent to which prices changes and the other factor causes fluctuation in the quantity demanded. The concept of demand elasticity is classified as price elasticity of demand, income elasticity of demand and the cross elasticity of demand (Davis, Geisler, and Nichols, 2016).
Price elasticity is used to determine the change that have occurred in the price of the product or the commodity. The formula is given below-
Ep = %change in quantity demanded/%change in price
= QDn (new) – QD/QD
P1-P/P
Where Ep is the price elasticity of the demand. QDn (new) is new quantity demanded and QD is original quantity demanded. Moreover, concerning the prices, P1 is the new price and P is the original price. The degree of change in the price is given below-
Elastic demand- It is the type of demand in which the change in the quantity demanded is more than the price of the commodity. It can be more than one and it is not unitary. The change is greater than elasticity of 1 (Zhang, Qian, Sprei, and Li, 2016). For example- the demand of common luxurious goods such as household appliances.
Types of Elasticity
Inelastic demand- it is the type of demand in which increase or decrease in price do not cause proper increase or decrease in the demand. The coefficient of elasticity remains less than 1. For example- when the prices of diamond or gold decreases to the extent that people starts selling the gold or diamond jewellery on the street, the preciousness of the jewellery will decrease so as the demand (Tarasova, and Tarasov, 2016).
Unitary demand- A change in the prices of the commodity is equal to the change in quantity demanded. For example- a price reduction of 20 percent result in increase in the demand by 20 percent. For example- designer clothes, bath soap and watches.
Income elasticity of demand- the demand for the product is not only affected by the price factors but other several factors such as consumer income because there always exist an effect of consumer income on the demand of the product (Bryan, Ye, Zhang, and Connor, 2018). The concept of elasticity may be given in regards to change in income of consumers-
Ey = % change in quantity demanded
The change is between the new income and the previous or existing income so as the change in between the previous quantity demanded and the new quantity demanded. Ey = income elasticity of demand, Y1 = new income, and the Y= original income (Esan, 2016).
Ey= new quantity demand (QDn) – original quantity demanded (QD)/ original demand
New income (Y1) – original income (Y)/ original income
Cross elasticity of demand- sometimes the demand for some goods can be affected by the change in price of other goods. It can be a substitute good or the complementary to the good whose price is being affected by the price or availability of the substitute goods. The response of the quantity demanded of a particular commodity to the changes in the rate and price of another commodity, it is referred as cross elasticity of demand. It is important to note that percentage change in the quantity demanded is of the first commodity but it is affected by the price of another product (Pham, Nghiem, and Dwyer, 2017). The relationship between the price and quantity demanded in the cross elasticity can be represented as-
Ec = QA2 – QA1/ QA1
PB2 – PB2/ PB1
Where QA2 is the new Quantity demanded of A. QA1 is the original quantity demanded of the product A. PB2 is the new price of the product B. It is seen that if the cross elasticity is positive then the commodity is substitutes. One of the example is that an increase of 2 percent in the price of the product of rice can cause a increase of 0.66 percent for the pan de sal. Same as if the cross elasticity of the goods is negative then the goods are complementary (Gostkowski, 2018). The impact on consumer behaviour is given below-
Price Elasticity of Demand
The price of the product is related to the ability of the consumer to buy the product and how much income is disposable in the consumer`s income budget. A change in the price of the car can force and drive the consumers to think and evaluate whether to buy the car or not. Whereas, the change in the price of toothpicks from 50 centavos per box to 60 centavos per box are taken in stride. The mindset of the consumer is also affected by the availability of substitutes. The more and closer are the substitutes, the more people will switch to the substitute especially when the price of the main product is more or if it is expensive (Aalami, Moghaddam, and Yousefi, 2015). Another factor on the part of elasticity of demand that affects the demand for the products can be can high priced goods generally have inelastic demand because the changes in the price of these products can lead to very small shift in demand. If an consumer spends large proportion of its total expenditure in buying a particular product, the demand would be elastic. On the other hand, if the consumer spends small proportion of its income then the demand can be inelastic for the products.
The preferences of families and individuals also changes due to type of the product such as if the product is luxury then its usage can be once ignored or adjusted but if the goods are necessary and the usage of the product cannot be ignored. The demand for the staples such as rice is inelastic, as the consumers cannot avoid them to buy (Fouquet, 2014). Whereas, magazines and comics are luxurious and their demand is elastic because people can avoid them buying when the prices are high. Most importantly, consumers who love reading can wait for the sale of books for buying magazines and comics whereas if there is a price hike in the prices, people may consider that they should switching to another staple but the shifting and switching will be very slow (Bönte, Nielen, Valitov, and Engelmeyer, 2015).
Conclusion
From the above conceptual discussion on the impact of elasticity of demand and supply on the individuals and the group of individuals, it can be concluded that the consumer behaviour is so dynamic. The buying behaviour is affected by various factors such as their disposable income to spend, wish to buy a particular product. The consumer may prefer more trending clothing wear while considering market so as the demand increases for the same. The concept of changes in the quantity demanded occurred due to change in the change in the prices are differentiated on the basis of degree of changes through inelastic, elastic and the unitary elastic demand. Moreover, the elasticity of demand is affected by the availability of low priced substitute and complementary goods. For example- the price of cement or if the price of the cement decreases, the tendency of the customers will not be affected as such to build or undertake construction of a building.
References
Aalami, H.A., Moghaddam, M.P. and Yousefi, G.R., (2015) Evaluation of nonlinear models for time-based rates demand response programs. International Journal of Electrical Power & Energy Systems, 65, pp.282-290.
Bönte, W., Nielen, S., Valitov, N. and Engelmeyer, T., (2015) Price elasticity of demand in the EPEX spot market for electricity—New empirical evidence. Economics Letters, 135, pp.5-8.
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Esan, O., (2016) Price elasticity of demand for psychiatric consultation in a Nigerian psychiatric service. African health sciences, 16(4), pp.1018-1022.
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Pham, T.D., Nghiem, S. and Dwyer, L., (2017) The determinants of Chinese visitors to Australia: A dynamic demand analysis. Tourism Management, 63, pp.268-276.
Tarasova, V.V. and Tarasov, V.E., (2016) Elasticity for economic processes with memory: Fractional differential calculus approach. Fractional Differential Calculus, 6(2), pp.219-232.
Zhang, Y., Qian, Z.S., Sprei, F. and Li, B., (2016) The impact of car specifications, prices and incentives for battery electric vehicles in Norway: Choices of heterogeneous consumers. Transportation Research Part C: Emerging Technologies, 69, pp.386-401.
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