Microeconomic Elasticity of Demand


Added on  2022-08-24

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Microeconomic Elasticity of Demand_1

Elasticity of demand
Demand elasticity includes principles which helps in measuring the extent to which consumers
respond to changes in demand caused by price changes and the other factors are considered as
constant. It helps in shows the willing power customers when the prices increase or decrease.
Calculation of elasticity of demand is done by dividing the percentage with the quantity change
by the percentage price change (Havranek, et al., 2018).
Elasticity = % change in quantity /% change in price
Demand elasticity is the % change in the demand is because of the % change in product prices. It
is because that the products demand is certain in some cases when the price change, demand of
the products may be elastic as well as inelastic. When the product demand is elastic than the
quality changes with the change in price and when the demand for product is inelastic, in that
case the quality is poor with the change in prices. In case of Therefore, the price change will
affect the demand for elastic products, but the impact on the demand for elastic products will be
small (Mankiw, 2020).
Take salt as an example. Even a sharp fall in prices may not cause a significant expansion in
demand. On the other hand, a small drop in orange prices may lead to a substantial increase in
demand. This is why we say that the needs of the former are "inelastic" and the needs of the
latter are "elastic".
Types of elasticity of demand are:
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Price elasticity of demand- The price elasticity of demand, usually called demand elasticity,
refers to the responsiveness and sensitivity of product demand to price changes.
Cross price elasticity of demand
It is considered as concept which is used for measuring the receptiveness of the commodity
demands when the prices change of another commodity. It is calculated by dividing the %
change in demand for one commodity by the % change in price of other product (Havranek, et
al., 2018).
The cross-price elasticity of demand= percentage change in the quantity of good A/ percentage
change in the price of the quantity of Good B
It is said that these two commodities are complementary. In case of prices of one product fall, the
demand for the other product will increase effectively. Also with the rise in price of one product,
the demand of other product will decrease. For example, gasoline and cars are complementary
commodities (Iossa and Martimort, 2015).
In the fall of one product prices, the two commodities can replace each other, and the demand
also decreases of the another product. Similarly, with the rise in one product the demand of other
commodity will increase. For example, tea and coffee are alternative commodities.
The cross-price elasticity of demand includes the relationship of demand of prices, that is, the
relationship between the quantity change required by one product and the price change of the
other product. When the products are substitutes, it will bring the positive cross elasticity of
demand. In case when the products includes positive cross elasticity and are complementary
commodities, it will help in showing the negative as well as indirect cross elasticty (Iossa and
Martimort, 2015).
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