Economics

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 6 (1899 words) Published: March 18, 2014
Elasticity is a measure of the sensitivity of one thing, to another (Bannock, 2011, p.116). It could be divided into price, income and cross-price elasticity of demand and supply and they are known as PED, YED ,XED and PES. They can be used to measure how the change in demand and supply of a product responds to the change in price, income and other commodities. Calculating price, income and crossprice elasticity can review the new cars market, it can be found that the demand and supply of new cars are always affected by these three factors. This essay will examine the economic factors that affect the elasticities for new cars.

First of all, this essay will now examine the PED. The price elasticity of demand "measures the responsiveness of quantity demanded to the price change of a product", and It can be calculated by "the percentage change in the quantity demanded divided by the percentage change in the price of a product" (Gillespie, 2011, p.56). If an answer of price elasticity is lower than 1 then the product could be said as price inelastic. This means the percentage change in quantity demanded of the product is smaller than the price change, demand is less related to the price change(Figure2). However, a product will be price elastic when the measurement of PED is greater than 1 which means the percentage change in quantity demanded is larger than the price change, demand is very sensitive to the price change(Figure1).

Figure1
Quantity demanded is very sensitive to the price change

Figure 2
Quantity demanded is less sensitive to the price change
(Source: Gillespie, 2009:9)
Moreover, there are some factors affecting the PED in new cars. New cars are price elastic when they face similar competing brands. For example, two new cars Audi S3 Sportback and BMW 135i, which have the similar functions and famous brand images. They have the same price meanwhile and Audi and BMW are two competing brands

(TopGear, 2013). However, if the price of the Audi one has been increased, the demand of it will decrease, people prefer buying the BMW one. Audi new cars become more price elastic. However, new cars are price inelastic when their firms have built relationship with consumers. For example, a strong brand as BMW, has tried two manners to build brand loyalty, which are strengthening customer relations and reconnecting with ex-customers (BMWBLOG, 2010). Even if the price increase, the demand may fall, but will be smaller than the price change. BMW new cars are still price inelastic.

In addition, this essay is going to discuss the income elasticity of demand. Anderton (2008:76) stated that "it measures the sensitivity of the change in quantity demanded to the income change" and the calculation of it is "the percentage change in quantity demanded divided by the income percentage change". When the outcome is between 0 to 1, the commodity is a necessity, and the demand change of it is not very sensitive to the income variation. Furthermore, the products are said as luxury goods when the YED is greater than 1, this means that the demand is very responsive to the income change. A positive sign of YED reflects the products are normal goods. The demand of normal goods raises as income increase and fall as income decrease(Figure3). But, the products are said as inferior goods if the result in the income elasticity of demand is lower than 1. The demand of these products increase as income falls and decrease when income increases(Figure4).

Figure3
The demand of normal goods raises as income increases
Figure4
The demand of inferior goods decrease when income increases
(Source: Gillespie, 2009:54)
The demand of new cars would increase when the income elasticity of demand is calculated as positive. For example, the income of urban Chinese has raised 70 times comparing with the past 35 years (CCTV, 2013). At the same time, an average of 36 percent raising on the luxury automotives such as Audi and BWM has been found every year...
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