One of the basic concepts of the economy - demand, depends on so many factors, which include the level of prices for goods, consumer income, product quality, and customer tastes. But most closely, demand depends on prices and their level. An indicator called “price elasticity of demand” captures changes in demand in accordance with a decrease or increase in prices by one percent.
The elasticity of demand is revealed in order to revise prices. The company, therefore, finds the most successful course in its pricing policy, so that it brings great economic benefits. The data obtained as a result allow you to get acquainted with the reaction of customers, set the direction of production in order to properly respond to changes in the market, and adjust the share occupied on it.
When calculating price elasticity of demand, the coefficient of cross elasticity and direct are used. To determine the latter, the ratio of changes in the volume of demand to relative changes in the prices of goods is calculated. This indicator allows you to set the percentage change in demand for changes in prices of goods by one percent. This coefficient has several values. So, if it approaches infinity, this means that along with a decrease in prices, the demand for buyers for goods increases, but if prices rise, then consumers completely refuse to buy. If the coefficient is greater than unity, then demand is growing rapidly and is ahead of price increases. When the coefficient is less than unity, the opposite situation is observed. If the direct price elasticity of demand is equal to unity, then the growth of prices and demand occurs at the same pace. With this indicator equal to zero, the price of goods does not affect demand in any way.
When revealing the coefficient of cross elasticity of demand by price, a comparison is made of the changes regarding the relative volume of demand for one particular product, when prices change by one percent to another. This indicator also has several values. So, if the coefficient is greater than zero, then the compared products mutually replace each other. If the price of butter rises, then demand, for example, for vegetable fat, may increase. If the coefficient constituting the cross elasticity of demand in terms of price is less than zero, then the goods being compared are mutually complemented. For example, when gas prices rise, there is a drop in demand for cars. With a coefficient equal to zero, the goods are not dependent on each other. That is, a change in the price of one does not affect the demand for the other.
For an enterprise engaged in the production of products, it is very important to identify indicators of elasticity. After all, the pricing policy of the company that produces the goods is usually formed from production costs, so the resulting price of the goods is designed not only to compensate them, but also to bring profit to the manufacturer. Therefore, it is so important to study the price elasticity of demand so that the enterprise’s pricing strategy is chosen correctly.
It is necessary to take into account the manufacturer that the elasticity of demand for its products may not coincide with the elasticity of demand in the market. The first indicator will always be higher than the second, with the exception of cases when the producer of the goods is a monopolist. When calculating price elasticity, one should not discount such an important factor as competition. Therefore, when calculating the coefficient of elasticity of demand, mathematical models are used, personal practical experience of the head of the enterprise is taken into account.
You can identify income elasticity of demand. If consumers have grown income by one percent, then demand will increase by the same amount. It follows from this that elasticity is equal to one.
The material presented allows us to conclude that elastic demand is the dynamics of consumer interest in certain groups of goods in accordance with changes in the level of prices for them.