Elasticity of Demand

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Elasticity of Demand

By | November 2011
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The purpose of this essay is to define elasticity of demand, cross-price elasticity, income elasticity, and explain the elastic coefficients for each. I will explain the contrast of and significance of difference between the three. I will also explain whether demand would tend to be more or less elastic for availability of substitutes, share of consumer income devoted to a good, and consumer’s time horizon, and give examples of each. Then, I will explain the logical impacts to business decision making that result from each. Last, I will differentiate between perfectly inelastic demand and perfectly inelastic demand, and illustrate the difference between the terms.

Elasticity of demand, also known as price demand elasticity, is defined as the measurement of “the responsiveness of demand for a product following a change in its own price” (tutor2u.net). Sales may increase when a price goes down. Sales may also decrease when prices go up. Examples of products with elasticity of demand are appliances and cars. When prices go down on cars, more people will buy them. The same can be said for appliances. For necessities such as food and clothes, you will see no significant change in sales with changes in price. This is called inelasticity of demand (business dictionary.com).

According to Mike Moffatt, former About.com Guide, the cross-price elasticity of demand measures the rate of response of quantity demanded of a good, due to the price change of another good”. Consumers may purchase more of one good when the price of its substitute increases. If the two goods are complements, meaning, you can’t have one without the other, a rise in the price of one good should cause the demand for both goods to fall. The formula for cross-price demand of elasticity is: (% Change in Quantity Demand for Good )/(% Change in Price for Good ) (economics.about.com). The measurement of how much the demand for goods change, with respect to a change in income, depends on whether the...

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