How is the elasticity of demand at a price

One of the main concepts of the economy - demand, depends on a lot of factors, which include the level of prices for goods, consumer incomes, product quality, and customer tastes. But most of all, demand depends on prices and their level. The indicator, called "price elasticity of demand," records the changes that occur with demand, in accordance with a reduction or increase in prices by one percent.

The elasticity of demand is revealed in order to make a price review. The enterprise, thus, finds the most successful course of its price policy, so that it brings greater economic benefit. The obtained data as a result allow to get acquainted with the reaction of buyers, set the direction of production in order to correctly react to the changes occurring in the market and adjust the share occupied by it.

When calculating the elasticity of demand for the price, the coefficient of cross elasticity and the straight line is used. To determine the latter, calculate the ratio of changes in the volume of demand to relative changes in commodity prices. This indicator allows you to establish the percentage change in demand for changes in prices for goods by one percent. This coefficient has several meanings. So, if it approaches infinity, it means that together with the decrease in prices, the demand of buyers for the goods increases, but if prices rise, then consumers completely refuse to purchase. If the coefficient is greater than one, the demand grows at a rapid pace and outstrips the price increase. If the coefficient is less than one, the opposite situation is observed. If the direct elasticity of demand for a price is equal to one, then the growth of prices and demand occurs at the same pace. With this indicator, equal to zero, the demand is not affected by the price of the product.

When the coefficient of cross-elasticity of demand for a price is found, a comparison is made between changes relating to the relative volume of demand for a particular commodity, when prices change by one percent to another. This indicator also has several meanings. So, if the coefficient is greater than zero, then the compared goods mutually replace each other. If the price of butter increases, then demand may increase, for example, vegetable fat. If the coefficient that makes up the cross elasticity of demand at a price is less than zero, then the compared goods are mutually complementary. For example, when prices for gasoline are rising, there is a drop in demand for cars. With a coefficient equal to zero, the goods do not depend on each other. That is, a change in the price of one does not affect the demand for another.

For an enterprise engaged in the production of products, it is very important to identify elasticity indicators. After all, the price policy of the goods producing company is usually formed from the costs of production, so the resulting price for the goods is designed not only to compensate them, but also to bring profit to the manufacturer. Therefore, to study the elasticity of demand for price is so important that the company's pricing strategy is chosen correctly.

It is necessary to take into account the manufacturer that the elasticity of demand for the products produced by him may not coincide with the elasticity of demand in the market. The first indicator will always be higher than the second, except when the producer of the goods is a monopolist. When calculating price elasticity, you should not discount such an important factor as competition. Therefore, in calculating the coefficient of elasticity of demand, mathematical models are used, personal practical experience of the enterprise manager is taken into account.

You can identify the elasticity of demand for income. If consumers have increased their income by one percent, then the demand for the same amount will increase. From this it follows that the elasticity is one.

The presented material allows to conclude that elastic demand is the dynamics of the consumer interest in certain groups of goods in accordance with changes in the level of prices for them.