Elements of elasticity in economic analysis

Economic
Analysis

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Elements of elasticity.............................................................................................................1
TASK 2............................................................................................................................................3
Impact of elasticity over business decision making...............................................................3
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Elasticity of demand refers to measurement of variability in quantity demanded in
response to the change in price of products or services. In economic terms, elastic demand is
arises when the price, income or other factors affect the purchasing behaviour of customer.
Basically, the price of a commodity has an inverse relationship with the demand of that product
according to 'the law of demand'. This assignment is based of TESCO, a British multinational
groceries and general merchandise retailer (Buer, 2016). It deals in various product categories
such as food, grocery items, clothing, furniture, financial services and many more throughout the
world. This report contains an explanation about the elasticity of demand and different elements
of elasticity. Further it also describes about the importance of elasticity of demand in decision
making process of TESCO and its practical application of this concept.
TASK 1
Elements of elasticity
In economics, elasticity refers to measuring the reaction of demand and supply due to
change in price or income level. This elasticity varies from product to product which depend
upon the need and requirement of consumers (Chandra, Gruber and McKnight, 2014).
Commodities that are considered as necessities of consumers tend to be less sensitive to
changing price as end users keep on buying these products despite of price increment. Following
formula is used for evaluating the elasticity of demand or supply of a commodity.
Elasticity = (%change in quantity/ %change in price)
When elasticity is greater than or equal to 1, curve is considered as elastic. But in case, it
is less than one, curve is considered as inelastic.
Source: Types of Elasticity of Demand, 2018
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Illustration 1: Types of Elasticity of Demand

Above given image shows the various types of factor in elasticity of demand which have
an direct impact over the demand or supply of goods or services. Elements of elasticity are of
three types, which are as follows:
 Price elasticity of demand:- It refers to the degree of responsiveness of demand due to
change in price of a product or services. Price elasticity of demand represent the
relationship between quantity demanded and price of commodity as well as shows the
effect of this change (Price Elasticity of Demand, 2016).
Source: Price Elasticity of demand, 2018.
Above given graph shows two axis i.e. price or quantity for presenting the relation
between the two. It shows that the demand of the product depends upon the price of
product. There are various factors which affect the price elasticity of demand such as
availability of close substitute product, income spent over commodity, cost of switching,
brand loyalty etc. For example: TESCO uses various sale promotional techniques during
Christmas by providing discount at price of their product. During this period customer
purchase more product for its store in order to avail this low product price opportunities.
As reduction in price of a commodity will automatically increase the demand of
customers. Price elasticity of demand is calculated as:
Ep = (Δq/Δp) (p/q)
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Illustration 2: Price Elasticity of demand