Elasticity is the reaction of demand or supply due to some changes. Demand elasticity is the change in demand which happens in a result of a change in other variables. It helps the organisation to calculate the change in demand in case other variables change. There are three factors that can affect demand.
Price elasticity of demand:
Price elasticity of demand (PED) is the change in demand according to a change in price. There are some factors affect PED, these factors are the following:
Substitutes: the number of substitutes in the market can affect PED, if it is easy for the customer to change the product demand will decrease. This is described as an elastic demand as it is easy to ...view middle of the document...
PED<1 PED is Price inelastic. It is similar to a perfect inelastic PED curve but demand will decrease slightly. The following diagram shows that as the price increase the demand will start to decrease. At the same time demand will not decrease that much as it is still an essential product. For example, gym protein shake, bodybuilders will still use it even if price is increased. But some of them might rely on food protein more than the shake. Also if a company increase their price they might be able to make more profit as a slight change will occur.
PED=1 PED has a constant elasticity. Simply, any increase or decrease in the price will not change the demand of the product.
PED>1 PED is elastic. In this case, any change in price will lead to a huge change in demand. As shown in the figure below when prices decrease demand increased. Business which are looking for extra demand or extra sales should decrease their prices. For example, if a chocolate bar cost £3, then the price was decreased to £1 demand will increase and the other way around.
PED is infinite which when the PED is perfectly elastic. Any change in price will lead to an infinite change in demand. The diagram shows that demand is infinite at any price. For example furniture, people’s demand of furniture is infinite at any price.
Income elasticity of demand:
It is the response of demand regarding a change in customer’s income. Factors affecting income elasticity of demand (YED) are
Necessity: the more necessary the product, the more inelastic demand. While luxury products have an elastic demand. For example, people will not able to live without using tap water even if the water supplier increased prices, while people can stop buying water bottles if the price increased.
Level of income: if the customer has low income, he would rather spend his money on necessities rather than luxuries which leads to an inelastic demand. While if the consumer’s income increased, he will spending money on luxury products which will lead to an elastic demand curve. For example, a poor family will spend their money on food and clothes but if they won the lottery they will move to a bigger house and travel around the world.
Economy: people living in countries with powerful economy will have high spending power so demand will increase. While people in weak economy will make sure that they spend the money with caution which will lead to a decrease in demand. Also companies have to produce a product which suits country’s living standards and economy. Real world example would be the difference in spending power and economy between Germany and Egypt. In Germany people will rather spend more than the people living in Egypt as the German economy is better, people are earning more and products are more suitable. While in Egypt the economy is in a recovery stage which led to that people are afraid to spend their money, lower living standards and lower spending power.
Income elasticity of demand can...