The Impact of Elasticity of Demand on Market Dynamics

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Elasticity of Demand

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Introduction
In this research, we are going to talk about the Elasticity of Demand and also the factors that are
necessary and are kept in mind while calculating the elasticity of demand. Also, we are going to
learn more about its types and role of government and the affects the elasticity of demand.

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Elasticity of Demand
Elasticity of Demand is defined as the percentage change in the quantity demanded divided by
the percentage change in the price. The variables of elasticity of demand depend upon 3 things:-
 Price of the goods, products and services
 Income of the consumer
 Price of related goods, products and services
Source: (Hutchinson, 2017)
Examples- if the price of Tea decreases from Rs. 100 to Rs.50, then automatically the demand of
that particular brand of tea will increase and people will buy more than any other brands of tea in
the market.
After government subsidy, the price of rice falls from Rs. 10/kg to Rs. 5/kg, this increases the
demand of rice among the people.

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Therefore, if the price of the product decreases, demand of the product increases. This is what is
called elasticity of demand.
Types of Elasticity of Demand
Let’s discuss about the types of elasticity of demand. There are 3 types of elasticity of demand
based on the variables that affects of the demand.
Price Elasticity
Price Elasticity is defined as the percentage change in the quantity demanded divided by the
percentage change in the price. The important point to note is that whenever the elasticity of
demand is given, it only implies the price elasticity (Zuo, et.al.2016).
Formula of price elasticity is written as
Price Elasticity = % change in quantity demanded/ %change in the price
Income Elasticity
Income elasticity is defined as the percentage change in the quantity demanded divided by the
percentage change in the income.
Income Elasticity = %change in quantity demanded/ % change in income
Cross Elasticity
Cross elasticity is defined as the rise in the price of product X which will automatically increase
the demand of product Y.

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Why Elasticity of Demand is important and why?
Elasticity of Demand is important for a country in various ways as it helps in:-
Getting the output level
For the better knowledge of output level of a country, it is important to know the elasticity of
demand. For the profit of GDP of a country, only those goods and services will be produced
which are in demand. The demand can always change because of the change in the price.
Therefore, the elasticity of demand will be helpful in determining the output level (Zuo, et. al.
2016).
Determination of Price
Elasticity of demand tells us that if the price of a product rises, then the demand of that product
will fall. So with the help of elasticity of demand, we can get to know about the determination of
price. If the demand is inelastic for the product, the producer will charge high price and if the
demand is elastic, then the producer will charge low price.
Determination of Factors of Production
Elasticity of Demand also depends upon the factors of production. If the demand of the product
is elastic, the price will be low but if the demand of the inelastic i.e. not much trending, then the
price of the product will be high.
Determination of Joint Products
Joint Products are considered as the price of the goods and services which are bought together
like chicken and wheat, cotton and seeds of cotton. The elasticity of demand here depends on the
production of these goods individually.

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Therefore the prices of cotton and seeds of cotton are high because their demand is inelastic as
compared to the prices of chicken and wheat whose prices are lower because their demand is
elastic ((Zuo, et. al. 2016).
Management of Elasticity of Demand
A company should maintain its price elasticity of demand in order to attain profit. This can be
managed when you know which of your product’s demand is more and which demanded less and
which are not in demand at all. It can be measured on the following points:-
Demand Elasticity
Demand is said to be elastic when the price of a rises, the demand falls and when the price of the
product falls, the demand of the product will increase. This will definitely affect the sales as
well. The sales will decrease if prices and will increase if price falls down.
Demand Inelasticity
Demand is to be said inelastic where the prices are increased but it doesn’t the demand at all.
The best example is cigarettes- if the Prices of cigarette are increased then it will not affect the
demand at all because the smokers will still buy them, no matter what. This is defined as the
demand inelasticity (Zuo, et. al. 2016).
Applying the Price Elasticity of Demand
Example- if you own an ice-cream shop and you want to increase the sales of the Vanilla ice-
cream because it is very low in demand. Therefore, what you can do is either provides some

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discount on the ice-cream which will increase the demand of the product and will also increase
the sales as well.
Second what you can do is, increase the price of the trending flavor like Chocolate, Fruit and
Nuts, etc, without changing the price of Vanilla. Once the price of those flavors increases, the
customer will then buy a product which is less expensive and then automatically the demand for
vanilla ice-cream will increase.
Advantages and Disadvantages of Elasticity of Demand
Let’s discuss about the merits and demerits of Elasticity of Demand
Advantages
Establishing a optimum price
In order to attain profit and increase sales of a particular product, goods and services, company
sets a price and examines the consumer’s reaction on the price of that product. The consumer is a
person who reacts to the changeable price quickly. This gives the company to set a price where
the demand will increase and consumer will buy more of the company’s services (Zuo, et. al.
2016).
Increasing Sales
If the price is low and the demand of the product is high, then automatically the sales of your
product will increase. This way a company can attain its profit and also maximize it.
Lower Tax

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If your product is in demand then automatically the tax are lowered down. The government
applies more tax to the commodities whose demand is inelastic. Therefore, if your product is in
demand then you can generate a good amount of revenue (Zuo, et. al. 2016).
Disadvantages of Demand
There is no specified disadvantage of Demand. It is only dependent on the company. A company
has to be smart enough to handle the changing moods and tends of the consumer, then there will
be no negative effect on the company.
If a company doesn’t know the price at which the consumer will like their product, or how to
increase and the demand and supply, then the elasticity of demand may not work for the
company and they have to face problems (Zuo, et. al. 2016).
Elasticity of Demand of Coffee in Canada
Elasticity of Demand is applied on the whole economy. The product may differ and its price and
demand will tell how well it is working in the economy. To explain more, I am taking an
example of Coffee Company in Canada named Hale Coffee Company situated in Toronto,
Canada.

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Source: (Lumenlearning, 2016)
This graph shows the demand and supply curve of Hale Coffee Company between 2007 and
2015. In 2007, the demand of the coffee from Hale Coffee Company was less which resulted in
the less supply of the coffee. But as we can see, the demand suddenly increased in 2011 and it
resulted in the increased rate in supply and sales. Again it then declined a lot in 2013 and 2014.
The reasons can be bad quality or the high prices. So this explains that the change in the price
and the quality can change the demand and supply rated of a product and it also effects the
economy as well.

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Source: (Phuc, 2016)
This graph shows the sales of Coffee from Hale Coffee Company in the coming years. As we can
see in this graph that as the quantity of the coffee increases, the sales or the value also increases
and when the quantity is decreased, the value also decreased. This shows that quantity of the
product can also help in the change of the demand and sales of the product.
Experience of People
Hale Coffee Company is a very trendy place to have a cup of Coffee in Canada. It has been given
5-star rating by the people who have visited there with their loved ones. Not only the taste of
coffee but the interiors are also appreciated. Here are some of the reviews of the people who
visited Hale Coffee Company.
K.C.A. said, “Hale Coffee is a really fun and friendly coffee stop. There is a good amount of space so
it's good for Strollers. They offer the usual drinks and some delish baked goods. I had a s'mores cookie
and it was def worth the calories. I usually order a latte which is but I've also been adventurous and

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ordered an almond chai which turned out to be so good.
The washrooms are shared with the other business so you have to grab a key on a stick which I always
think is pretty gross. And there is no change table in the washroom which sucks if you have a little one.
There is usually a good mix of a crowd there, some people working, some socializing, some people on
their own and I've never had trouble finding a spot to sit.
Really like this place and it's within walking distance of Boulderz which is an added plus.”
Dekko, C said, “Wonderful little gem. I had the chance to try a latte before a shoot up stairs in The Mint
Room. Very spacious cafe and the latte was great. I would visit again and would be completely
comfortable to bring a client here to chat and have coffee. Will visit again soon.”
Saba, A. “Been here for a few times now! I can easily say that this is one of my top cafes in Toronto!
The coffee here is great! I tried their latte and cappuccino and both were great! The pistachio croissants
are to die for!
Music is great which gives it a nice vibe! I usually spend her a couple of hours working! ”
Greg, B said, “Stopped by for a coffee on Easter Weekend and so glad I did. Probably the best
coffee I've had in the City. Staff are great and they have excellent snacks and sandwiches too.
Great selection of coffee to take home, which you should as everything is roasted on-site.
Beautiful space as well to sit and relax and have a few cups of coffee”
Stephanie, S said, “Who would've thought that you can actually get some work done at a café IN
Square One? Well, it's possible here...if you get to Hale when it's not super-busy and most importantly,
you get a seat on the tufted Chesterfield!

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Staff is young and fun! They were out of wraps for their $10 Brekkie Deal (wrap + muffin/pastry +
coffee), but were super apologetic, offering other alternatives. Loved this!
They had 2 different kinds of coffee available, both on the more medium side. Ethiopian was quite tart,
berry notes. Apple/Cinnamon muffin was good, not too sweet.
Although sandwich was good value, scrambled eggs were a bit too salty. There was also chunks of potato
in my sandwich which I thought was weird. I've never had baby potatoes, quartered, in a sandwich
before. Again, it was only $10 for the combo, so if next time I'll just ask them to hold the potatoes.
Good vibes! If you wanna get work done, I suggest that you go early...”