Cross elasticity. Price Elasticity of Demand

The analysis made it possible to identify the general directions of changes in supply and demand under the influence of price and non-price factors and formulate a basic law - the law of supply and demand. However, it is often not enough for a researcher to know that an increase in price causes a reduction in the volume of demand for a product; a more accurate quantitative assessment is needed, because the specified reduction can be fast or slow, strong or weak.

Sensitivity to changes in prices, income or any other indicators of market conditions is reflected in the elasticity indicator, which can be characterized by a special coefficient.

The concept of elasticity in economic theory appeared quite late, but very quickly became one of the fundamental ones. The general concept of elasticity came to economics from the natural sciences. The term “elasticity” was first used and applied in scientific analysis by a famous 17th century scientist, physicist and chemist Robert Boyle(1626-1691) when studying the properties of gases (the famous Boyle-Mariotte law).

The economic definition of elasticity was first given in 1885. The famous English scientist does not invent this concept, but using the achievements of English classics (Adam Smith and David Ricardo) and the mathematical school in economic theory, he gives a definition of the coefficient of price elasticity of demand.

The introduction of elasticity into economic analysis is of great importance:

• on the one hand, the elasticity coefficient is a statistical measurement tool, including one actively used in marketing research (consulting firms in the USA charge from $50,000 to $75,000 to calculate elasticity for private firms);
• on the other hand, the concept of elasticity serves as an important tool for economic analysis, since in science it is not enough just to measure, it is also necessary to be able to explain the result obtained.

Today there is not a single section of economics where the concept of elasticity is not used: analysis of supply and demand, theory of the firm, theory of business cycles, IEO, economic expectations, etc.

The most general definition of elasticity— the ratio of the relative increment of the function to the relative increment of the independent variable.

For the demand and supply functions we are considering, such independent variables can be the prices of this or other goods, the level of income, costs, etc.

Elasticity coefficient

Elasticity coefficient shows the degree of quantitative change in one factor (for example, the volume of demand or supply) when another (price, income or costs) changes by 1%.

Elasticity of demand or supply is calculated as the ratio of the percentage change in the quantity of demand (supply) to the percentage change in any determinant.

Determinants are factors that influence demand or supply.

Different products differ in the degree to which demand changes under the influence of one or another factor. The degree of responsiveness of demand for these goods can be quantified using the elasticity of demand coefficient.

The concept of elasticity of demand reveals the process of market adaptation to changes in the main factors (price of a product, price of a similar product, consumer income).

Methods for calculating the elasticity coefficient

When calculating the elasticity coefficient, two main methods are used:

Arc Elasticity(arc elasticity) - used to measure the elasticity between two points on a demand or supply curve and assumes knowledge of initial and subsequent price levels and volumes.

Using the arc elasticity formula gives only an approximate elasticity value, and the more convex the arc AB is, the greater the error.

Elasticity at a point(point elasticity) - used when the demand (supply) function and the initial level of price and quantity of demand (or supply) are specified. This formula characterizes the relative change in the volume of demand (or supply) with an infinitesimal change in price (or some other parameter).

Example 1

Condition: Let the demand function have the form .

Estimate the price elasticity of demand at price .

Solution:

Answer: The economic meaning of the obtained value is that a change in price by 1% relative to the initial price P = 10 will lead to a change in the quantity demanded in the opposite direction by 1%. Demand has unit elasticity

Example 2

Condition: Let the demand equation be given: P = 940 - 48*Q+Q 2

Estimate the price elasticity of demand for sales volume Q = 10.

Solution:

• At Q = 10, P=940 - 48*(10)+10 2 = 560
• Now let's find the value of dQ/dP. However, since the equation is for quantity rather than price, we need to find the value of dP/dQ:
• Mathematically proven: dQ/dP = 1 / (dP / dQ)
• And this gives us: dQ/dP = 1 / (-48 +2*Q).
• With Q = 10 we get: dQ/dP = -1/28.
• Substituting into the elasticity formula at a point, we get: E = (dQ/dP)*(P/Q) = (-1/28)*(560/10) = -2

Answer: The economic meaning of the obtained coefficient is that a change in the market price by 1% relative to the current price P = 560 will change the quantity of demand in the opposite direction by 2%. Demand at this point is elastic.

Elastic properties

From the definition of elasticity and the above formulas, we can deduce the basic properties of elasticity:

1. Elasticity is an immeasurable quantity, the value of which does not depend on the units in which we measure volume, prices or any other parameters.
2. Elasticity of mutually inverse functions - mutually inverse quantities:

• E d - price elasticity of demand;
• E p - price elasticity according to demand;

3. Depending on the sign of the elasticity coefficient between the factors under consideration, the following may occur:

• Direct dependence, when the growth of one of them causes an increase in the other and vice versa, for example, the elasticity of demand for goods by consumer income E > 0;
• An inverse relationship, when an increase in one of the factors implies a decrease in another, for example, price elasticity of demand E<0;

4. Depending on the absolute value of the elasticity coefficient, the following are distinguished:

• E = ∞, or absolute elasticity, when a slight change in any parameter increases (or decreases) the volume by an unlimited amount.
• |E| > 1, or elastic demand (supply) when a parameter grows at a faster rate than another factor changes.
• E = 1, or unit elasticity, when the parameter under consideration grows at the same rate as the factor influencing it;
• 0 < E < 1, или inelastic demand (supply), when the growth rate of the parameter under consideration is less than the rate of change of another factor;
• E = 0, or absolute inelasticity when a change in any parameter of market conditions does not affect the value of the factor under consideration;

Let's take a closer look at the most common elasticity indicators:

• direct price elasticity of demand
• income elasticity of demand,
• cross elasticity of demand,
• price elasticity of supply.

Price Elasticity of Demand

Price Elasticity of Demand shows the degree of quantitative change in demand when the price changes by 1%.

For all goods, with the exception of , the price elasticity of demand is negative.

There are three options for the dependence of the volume of demand on fluctuations in market prices:

1. Inelastic demand occurs when the quantity purchased of a good increases by less than 1 percent for every one percent decrease in its price.
2. An increase in the purchased product by more than 1% and a decrease in its price by 1%. This option characterizes the concept elasticity demand.
3. The quantity of goods purchased doubles as a result of its price being halved. This characteristic introduces the concept unit elasticity.

• ΔQ—change in demand;

Factors of demand elasticity

Among the main factors determining the price elasticity of demand are the following:

• availability and accessibility of substitute products on the market (if there are no good substitutes for a product, then the risk of a decrease in demand due to the appearance of its analogues is minimal);
• time factor (market demand tends to be more elastic in the long run and less elastic in the short run);
• the share of spending on a product in the consumer budget (the higher the level of spending on a product relative to the consumer’s income, the more sensitive the demand for price changes will be);
• the degree of market saturation with the product in question (if the market is saturated with some product, for example, refrigerators, then it is unlikely that manufacturers will be able to significantly stimulate their sales by lowering prices, and vice versa, if the market is unsaturated, then lowering prices can cause a significant increase in demand);
• variety of possibilities for using a given product (the more different areas of use a product has, the more elastic the demand for it. This is due to the fact that an increase in price reduces the area of ​​economically justified use of a given product. On the contrary, a decrease in price expands the scope of its economically justified use. This explains the fact that the demand for universal equipment is, as a rule, more elastic than the demand for specialized equipment);
• the importance of the product for the consumer (if the product is necessary in everyday life (toothpaste, soap, hairdresser services), then the demand for it will be inelastic to price changes. Products that are not so important for the consumer and the purchase of which can be postponed are characterized by greater elasticity ).

Factors of demand inelasticity

The sensitivity of different consumer groups to the price of the same product may differ significantly.

The consumer will be price insensitive under the following conditions:

• The consumer attaches great importance to the characteristics of the product (demand is price inelastic if “failure” or “deceived expectations” lead to significant losses or inconveniences. To avoid such a situation, a person is forced to overpay for the quality of the product and purchase those models that perform well recommended);
• The consumer wants a custom-made product and is willing to pay for it (if the buyer wants a product made to suit his individual needs, he often becomes tied to the manufacturer and is willing to pay a higher price as a fee for the hassle. Later, the manufacturer can increase the price of its services without much risk of losing a buyer)
• The consumer has significant savings from using a specific product or service (if the product or service saves time or money, then the demand for such a product is inelastic)
• The price of the product is small compared to the consumer’s budget (if the price of the product is low, the buyer does not bother going shopping and carefully comparing products)
• The consumer is poorly informed and makes poor purchases.

Income Elasticity of Demand

Income Elasticity of Demand can be defined by analogy with price elasticity of demand as the degree of quantitative change in income by 1%.

Due to the fact that an increase in income increases the possibilities of making purchases, the demand for most goods increases with an increase in income, i.e. The income elasticity of demand is positive. If the elasticity coefficient in absolute value is extremely small (0<Е<1), то речь идет о товарах первой необходимости. Если же — достаточно велик (Е>1), then about luxury goods.

For low quality goods, i.e. "relative to the worst", the income elasticity of demand will be negative (E<0).

Cross elasticity of demand

Cross elasticity coefficient characterizes the degree of change in demand for one product when the price of another product changes by 1%.

Depending on the nature of the relationship between the analyzed goods, the coefficient can be positive, negative or equal to zero:

• If E > 0, then the goods are interchangeable (for example, butter and margarine). An increase in the price of one good leads to an increase in the demand for another, replacing it.
• If E< 0, то товары считаются взаимодополняющими (например джин и тоник). Повышение цены на один товар ведет к сокращению спроса на другой.
• If E = 0, then the goods are considered independent of each other and an increase or decrease in the price of one product has virtually no effect on the amount of demand for the second product.

The main factor determining the cross elasticity of various goods is the consumer properties of various goods, their ability to replace or complement each other in consumption. Cross elasticity can be asymmetric in nature, when one product is strictly dependent on another. For example: the computer market and the mouse pad market. A reduction in the price of computers causes an increase in demand in the rug market, but if the price of rugs decreases, it will not have any effect on the quantity of demand for PCs.

The cross elasticity coefficient can be used, with certain caveats, to determine the industry boundary. High cross-elasticity of a product group suggests that the products belong to the same industry. The low cross-elasticity of one product relative to all other products indicates that it constitutes a separate industry. If, similarly, several products have high cross-elasticities among themselves, but low cross-elasticities with respect to other products, then this group of products may represent an industry. For example, different brands of televisions have high cross-elasticities with each other, but low cross-elasticities with other household products.

The main difficulties in determining industry boundaries using the cross-elasticity coefficient are as follows:

• First, it is difficult to determine how high the cross-elasticity should be in a particular industry (for example, the cross-elasticity of frozen vegetables can be very high, but the cross-elasticity of frozen vegetables and dumplings can be quite low, so it is unclear whether we should talk about the frozen food industry or about two industries);
• secondly, there is a chain of cross-elasticity (thus, between standard color and portable color TVs, on the one hand, and between portable color and portable black-and-white TVs, on the other, there is a high cross-elasticity. However, between standard color TVs and portable black-and-white -white cross-elasticity is rather weak).

Elasticity of supply

Price elasticity coefficient supply shows the degree of quantitative change in supply when the price changes by 1%.

The degree of change in the volume of supply depending on the change in price characterizes price elasticity of supply. The measure of this change is supply elasticity coefficient, calculated as the ratio of supply volume to price increases.

• ΔS is the change in supply;
• ΔP — change in the market price of the product;

Factors determining the elasticity of supply

The main factors determining the elasticity of supply are:

1. time period (instant, short-term, long-term)

• for the instantaneous period, supply is inelastic;
• for a short-term period, production can, within certain limits, adapt to changing prices;
• for the long run, supply is elastic;

2. specificity of production (minimum amount of costs for expanding production);
3. storage possibilities for manufactured products;
4. the maximum possible production volume at full capacity utilization.

The study of elasticity of supply is a necessary condition for the study of the relative change in supply in accordance with the relative change in market price.

If the quantity supplied of a good remains unchanged for resale at any price, then inelastic supply occurs. When a small change in price causes supply to decrease to zero, and a small increase in price causes an increase in supply, then this situation characterizes a perfectly elastic supply.

Thus, the elasticity of supply changes under the influence of technological progress, changes in the qualitative and quantitative composition of the resources used, increasing the limited resources used in the production of a particular product, which leads to a decrease in the value of the elasticity of supply.

Conclusion

In its most general form, the demand (or supply) function for a product depends on a huge number of price and non-price determinants.

The elasticity of demand (or supply) with respect to any of the determinants characterizes the sensitivity of the quantity of demand (or supply) to a percentage change in this determinant, while other determinants are assumed to be constant.

Mathematically, this means that to determine elasticity at a point, it is necessary to find the partial derivative of the demand (or supply) function with respect to some determinant.

To determine the “rate of change” in the demand and supply of goods on the market, economists introduced the concept of “elasticity”.

The concept of elasticity was first introduced into economics by Alfred Marshall (1842–1924)

Under elasticity should be understood as the percentage of change in the value of one variable as a result of a change by one unit in the value of another variable. Based on all of the above, we come to the conclusion that elasticity shows by what percentage one economic variable will change when another changes by one percent.

The ability of consumption and demand to change within certain limits under the influence of economic factors is called elasticity of consumption and demand. Elasticity of supply and demand is essential for economic development projects and economic forecasts.

Without it, not a single market (mixed) economic system functions now.

Under elasticity of demand one must understand the extent to which demand changes in response to price changes.

Under elasticity of supply one must understand the relative changes in the prices of goods and their quantities offered for sale.

Price Elasticity of Demand

There are the following types of elasticity of demand:

1. elastic demand is considered as such if, with minor price increases, sales volume increases significantly;
2. unit elasticity demand. When a 17% change in price causes a 1% change in the demand for a good;
3. inelastic demand. It will be that with significant changes in price, sales volume changes insignificantly;
4. infinitely elastic demand. There is only one price at which consumers buy the product;
5. perfectly inelastic demand. When consumers purchase a fixed quantity of goods regardless of their price.

Price elasticity of demand, or price elasticity of demand, shows how much the quantity demanded for a product changes in percentage terms if its price changes by 1%.

The elasticity of demand increases in the presence of substitute goods - the more substitutes, the more elastic the demand will be, and decreases with increased consumer demand for a given product, i.e. the degree of elasticity is lower, the more necessary the product is.

If you indicate the price R, and the quantity of demand Q, then the indicator (coefficient) of price elasticity of demand Er equal to:

where Δ Q- change in demand, %; ?Р – price change, %; "R"- in the index means that elasticity is considered by price.

Similarly, you can determine the elasticity indicator for income or some other economic value.

The indicator of price elasticity of demand for all goods is a negative value. Indeed, if the price of a product decreases, the quantity demanded increases, and vice versa. In this case, to assess elasticity, the absolute value of the indicator is often used (the minus sign is omitted). For example, a decrease in the price of sunflower oil by 2% caused an increase in demand for it by 10%. The elasticity index will be equal to:

If the absolute value of the price elasticity of demand indicator is greater than 1, then we are dealing with relatively elastic demand: a change in price in this case will lead to a larger quantitative change in the quantity of demand.

If the absolute value of the price elasticity of demand indicator is less than 1, then demand is relatively inelastic: a change in price will entail a smaller change in the quantity demanded.

If the elasticity coefficient is equal to 1 – ϶ᴛᴏ unit elasticity. In this case, a change in price leads to the same quantitative change in the quantity demanded.

There are two extreme cases. In the first, there is only one price possible, at which the product will be purchased by buyers. Any change in price will lead either to a complete refusal to purchase a given product (if the price rises) or to an unlimited increase in demand (if the price decreases) - demand is absolutely elastic, the elasticity index is infinite. Graphically, this case can be depicted as a straight line parallel to the horizontal axis. For example, the demand for lactic acid products sold by an individual merchant in a city market is absolutely elastic. At the same time, market demand for lactic acid products is not considered elastic. The other extreme is an example of perfectly inelastic demand, where a change in price is not reflected in the quantity demanded. The graph of perfectly inelastic demand looks like a straight line perpendicular to the horizontal axis. An example is the demand for certain types of medicines, without which the patient cannot do, etc.

Based on all of the above, we come to the conclusion that the absolute value of the price elasticity of demand indicator can vary from zero to infinity:

From formula (1) it is clear that the elasticity indicator depends not only on the ratio of price and volume increases or on the slope of the demand curve, but also on their actual values. Even if the slope of the demand curve is constant, the elasticity will be different for different points on the curve.

There is one more circumstance that should be taken into account when determining elasticity. In areas of elastic demand, a decrease in price and an increase in sales volume lead to an increase in the total revenue from sales of the company's products, in an area of ​​inelastic demand - to its decrease. Therefore, each company will strive to avoid that part of the demand for its products where the elasticity coefficient is less than one.

Income elasticity of demand. Cross Elasticity

Under income elasticity of demand refers to changes in demand for a product due to changes in consumer income. If an increase in income leads to an increase in demand for a product, then this product belongs to the “normal” category; if the consumer’s income decreases and the demand for the product increases, the product belongs to the “inferior” category. For the most part, consumer goods fall into the normal category.

Income elasticity measures indicate whether a given good is categorized as “normal” or “inferior.”

Income elasticity of demand is equal to the ratio of the percentage change in the quantity demanded of a good to the percentage change in income and can be expressed as the following formula:

Where E1D- coefficient of elasticity of demand depending on income;

Q0 and Q1- the amount of demand before and after a change in income;

I0 and I1- income before and after the change.

The elasticity of demand is greatly influenced by the presence on the market of goods designed to satisfy the same need, i.e. substitute goods. The elasticity of demand for a product is higher, the more opportunities a buyer has to refuse to purchase a particular product if its price rises.

As our income increases, we buy more clothes and shoes, high-quality food products, and household appliances. But there are goods for which the demand is inversely proportional to the income of consumers: all “second hand” products, certain types of food (cereals, sugar, bread, etc.)

For essential goods, such as bread, demand is relatively inelastic. With all this, the demand for certain types of bread is relatively elastic. The demand for cigarettes, medicines, soap and other similar products is relatively inelastic.

If there are a significant number of competitors on the market, the demand for products from companies producing similar or similar products will be relatively elastic. As the competitiveness of firms increases, when many sellers offer the same products, the demand for each firm's product will be perfectly elastic.

To determine the degree of influence of a change in the price of one product on a change in demand for another product, the concept of cross elasticity is used. Thus, a rise in the price of butter will cause an increase in demand for margarine, a decrease in the price of Borodino bread will lead to a reduction in demand for other types of black bread.

Cross Elasticity- demand dependence from substitute goods and goods that complement each other.

- ϶ᴛᴏ the ratio of the percentage change in demand for product A to the percentage change in the price of product B:

where “c” in the index means cross elasticity (from the English cross)

The value of the coefficient depends on which products are considered - interchangeable or complementary. The cross elasticity coefficient is positive if the goods interchangeable; negative if goods complementary, such as gasoline and automobiles, cameras and film, the quantity demanded will change in the direction opposite to the change in prices.

Based on all of the above, we come to the conclusion that by determining the value of the cross-elasticity coefficient, we can find out whether the selected goods are considered complementary or interchangeable, and how a change in the price of one type of product produced by a company can affect the demand for others types of products from the same company. It must be remembered that such calculations will help the company when making decisions on the pricing policy for its products.

Price elasticity is greatly influenced by time factor. Demand is less elastic in the short run and more elastic in the long run. It is this tendency of change in elasticity over time that is explained by the consumer’s ability to change his consumer basket over time and find a substitute product.

Differences in demand elasticity are also explained significance of this or that product for the consumer. The demand for necessities is inelastic; demand for goods that do not play an important role in the consumer's life is usually elastic.

Elasticity of supply

Elasticity of supply- sensitivity of the supply of goods to changes in prices for these goods.

The elasticity of supply is influenced by: the presence or absence of production reserves - if there are reserves, then in the short term supply is elastic; availability of the ability to store stocks of finished products - supply is elastic.

There are the following types of elasticity of supply:

1. elastic offer. A 1% increase in price causes a significant increase in the supply of goods;
2. proposition of unit elasticity. A 1% increase in price leads to a 1% increase in the supply of goods on the market;
3. inelastic supply. The price increase does not affect the quantity of goods offered for sale;
4. elasticity of supply in the instantaneous period (i.e., the period of time is short, and producers do not have time to react to changes) - supply is fixed;
5. elasticity of supply in the long run (a period of time sufficient to create new production capacities) - supply is the most elastic.

In order to determine how the production of a particular product affects price changes, the price elasticity of supply is measured.

Elasticity of supply is measured by the relative (percentage or fraction) change in quantity supplied when price changes by 1%.

Formula coefficient of price elasticity of supply is similar to calculating the coefficient of price elasticity of demand. The only difference is that instead of the quantity of demand, the quantity of supply is taken:

Where Q0 u Q1- offer before and after price change; P0 And P1- prices before and after the change; s- in the index means the elasticity of supply.

Unlike demand, supply is less related to changes in the production process and is more adaptable to changes in price.

The elasticity of supply is influenced by: the presence or absence of production reserves - if there are reserves, then in the short term the supply is elastic; availability of the ability to store stocks of finished products - supply is elastic.

Elasticity of supply taking into account the time factor

The time factor is a key indicator in determining elasticity. There are three time periods that affect the elasticity of supply - short-term, medium-term and long-term.

Short term- too short for the firm to make any changes in the volume of output, and in this time period supply is inelastic.

Medium term increases the elasticity of supply, as it makes it possible to expand or reduce production at existing production facilities, but it is not sufficient to introduce new capacities.

Long term with an increase in demand for the goods of the industry, it allows the company to expand or reduce their production capacity, as well as the influx of new firms into the industry or, if the demand for the products of the industry decreases, the closure of firms. The elasticity of supply in this period is higher than in the two previous periods.

Do not forget that it will be important to say that supply in the current period remains fixed, since manufacturers do not have time to respond to changes in the market.

The practical significance of the elasticity of supply and demand

Elasticity of demand is an important factor influencing a company's pricing policy. If supply is elastic, then due to an increase in the price of a product and a reduction in production volume, the tax burden falls mainly on the consumer, the amount of tax is reduced compared to the amount of tax with inelastic supply, and society's losses increase.

Based on all of the above, we come to the conclusion that the theory of elasticity of supply and demand has important practical significance. An increase in production costs actively forces the enterprise to increase product prices. To know how sales will react to these changes and to choose the right pricing strategy for an enterprise, it is necessary to determine the elasticity of supply and demand for a given product. The following should be kept in mind: the elasticity of demand for a firm's product and the elasticity of market demand are not the same. The first is always (with the exception of the firm's absolute monopoly on the market) higher than the second. Calculating the price elasticity of demand for a company's products is quite complex, since it is extremely important to take into account the reaction of competitors to a company's increase or decrease in prices, to use mathematical models or the experience of the company's managers.

If a company, when making a price decision, is guided only by data on the elasticity of market demand, then sales losses from price increases may become more significant than expected.

Suppose: some company has built an apartment building and is deciding at what price apartments should be offered to tenants. Construction and operating costs are virtually independent of how many apartments will be delivered (except for the cost of ongoing repairs, which is a small proportion of total costs). When a firm knows the demand for apartments and its elasticity, it can determine at what price it should rent apartment data in order to ensure maximum revenue. With this, maximum revenue can be achieved even if some of the apartments remain empty.

Taking into account the dependence on the elasticity of demand and supply for certain types of goods and services, the tax burden will be distributed differently between producers and consumers of products.

By introducing indirect taxes, the state aims to increase the volume of tax revenues to the budget for the redistribution of resources in the economy, the redistribution of income of the population and support for the poor, the development of the social sphere, infrastructure, defense, etc.

1. To determine the “rate of change” of supply and demand, economists use the concept of elasticity of supply and demand. Elasticities of supply and demand are essential for economic development projects and economic forecasts. Elasticity should be understood as the percentage of change in the value of one variable as a result of a change of one unit in the value of another.

2. Price elasticity of demand, or price elasticity of demand, shows how much the quantity of demand for a product changes in percentage terms when its price changes by 1%.

3. If the absolute value of the price elasticity of demand indicator is greater than 1, then we are dealing with relatively elastic demand. If the absolute value of the price elasticity of demand indicator is less than 1, then demand is relatively inelastic. With elastic demand, a decrease in price and an increase in sales volume lead to an increase in the total revenue from sales of the company's products; in the area of ​​inelastic demand, it leads to a decrease in revenue. Let us note that each firm strives to avoid that segment of demand for its products where the elasticity coefficient is less than one.

4. With an elasticity coefficient equal to 1 (unit elasticity), a change in price leads to the same quantitative change in the quantity demanded.

5. Income elasticity of demand is the ratio of changes in demand for a product to changes in consumer income.

6. Cross elasticity of demand is used to determine the degree to which the quantity of demand for a given product is affected by changes in the price of another product (a product that replaces a given product or a product that complements it)

7. Cross elasticity coefficient - ϶ᴛᴏ ratio of the percentage change in demand for a product A to the percentage change in the price of a product B.

8. Elasticity of supply - the sensitivity of the supply of goods to changes in prices for these goods. Elasticity of supply is measured by the relative (percentage or fraction) change in quantity supplied when price changes by 1%.

9. The time factor has an important influence on the elasticity of supply. When estimating supply elasticity, three time periods are considered: short-term, medium-term and long-term.

Cross elasticity of demandE XY , characterized by a relative change in demand for a product X in response to a change in the price of another good Y, is calculated by the formula:

The coefficient of cross elasticity of demand can take negative, positive and zero values ​​depending on whether the other product is a substitute (substitute) or a complementary product.

Interchangeable goods have a cross elasticity coefficient E XY > 0 . If consumers buy more of a product X when the price of good Y increases, then economists say that X is a substitute Y(A Y is a substitute X). For example, when the price of beef increases, consumers increase their demand for chicken. The more substitutes available to consumers, the more elastic the demand for a product becomes. X.

Complementary products have a cross elasticity coefficient E XY < 0 . If consumers reduce purchases of a product X when the price of goods rises Y, then economists call these goods complementary goods. Very often, such goods can only be used together, or one of them represents the raw material for the manufacture of another product. For example, an increase in electricity prices reduces the demand for many electrical appliances, and an increase in the price of flour leads to a decrease in the demand for confectionery products. The higher the cross elasticity coefficient, the greater the degree of substitutability between two goods.

Independent Products have a cross elasticity coefficient: E XY = 0 . In this case, a change in the price of one product does not in any way affect the demand for another product, that is, the two goods are considered completely unrelated to each other. For example, with an increase in the price of bread, the demand for cement will not change.

5.6. Price elasticity of supply and types of supply elasticity

Price elasticity of supply shows how the quantity of goods offered for sale will change in response to a change in the price of these goods.

In contrast to price elasticity of demand, which shows the reaction of buyers to changes in price, price elasticity of supply is the response to price changes on the part of the seller.

Price elasticity of supply measures the degree of change in the quantity supplied by a change in the price of a product:

Price elasticity coefficient of supply shows by what percentage the volume of supply of a product will change as a result of a 1% change in the price of this product.

The method for calculating the price elasticity coefficient of supply is similar to the method for calculating the demand elasticity coefficient:

,

Where – price elasticity coefficient of supply; And – original and new price;
And – the initial quantity supplied of the product and the quantity supplied after the price change.

Elasticity of demand characterizes the degree of response of demand to the action of any factor. Depending on the type of factor affecting demand, there are price elasticity of demand, income elasticity of demand and cross elasticity of demand.

The elasticity of demand directly depends on changes in influencing factors. Certain changes cause changes in the consumption of goods and services, and this indicates elasticity of demand, and if the factors influencing demand do not cause significant changes directly in market demand, then elasticity of demand does not occur. If demand does not change when the price of a product increases, then it is inelastic. If the changes exceed the price changes, then demand is elastic. The elasticity of demand significantly affects the income of the enterprise producing the goods. If it is less than one, then when the price of a product increases, income increases, but if it is greater than one, then an increase in the price of a product negatively affects the level of income. Economists use elasticity of demand to determine the sensitivity of consumers to changes in the price of a product. If small changes in price lead to significant changes in the quantity purchased, then such demand is called relatively elastic or simply elastic. If a large change in price leads to a small change in the quantity purchased, then such demand is relatively inelastic or simply inelastic.

Elasticity of demand - changes in demand for a given product under the influence of economic and social factors associated with changes in prices; demand can be elastic if the percentage change in its volume exceeds the decrease in the price level, and inelastic if the degree of price decrease is greater than the increase in demand.

Price Elasticity of Demand

As already defined above, the level of market demand for a product depends primarily on the selling price. However, for each individual product, the dependence of changes in the volume of demand on changes in the price level may be different. And often it is important to determine not the absolute volume of demand, but its reaction to price changes.

Measuring the dependence of changes in the volume of demand on changes in price requires the introduction of the concept of elasticity as an indicator of the degree of influence of one variable on another. In mathematics, elasticity is understood as the ratio of the growth rate of the dependent variable to the growth rate of the independent variable. Traditionally, for the purposes of its measurement, elasticity coefficients of different types are used. The economic meaning of the elasticity coefficient is that it shows by how many percent the dependent variable (in this case, the volume of demand) will change when the independent variable changes by one percent. The latter may be the price of a given product, the prices of other goods, the level of income, etc.

This concept was first explored in its application to economics by A. Marshall in 1881 -1882.

Data on the elasticity of demand are necessary when making decisions on price revisions, its direction and the degree of changes in prices for individual goods. This allows for a reasonable pricing policy, both from the point of view of commercial benefits and increasing the population. The use of this data makes it possible to identify the consumer’s reaction to price changes, prepare production for changes in demand, and regulate the market.

Information about the elasticity of demand can also be used when setting the level of the commodity tax (), making decisions on the appropriate marketing policy of an enterprise or firm, and conducting various operations in the foreign market (export-import transactions, transactions with exchange rates, etc.).

The coefficients of price elasticity of demand are divided into several types: the coefficient of direct price elasticity of demand, the coefficient of cross price elasticity of demand, and the coefficient of income elasticity of demand.

Demand elasticity coefficient

An example of calculating the elasticity coefficient. As a result of a reduction in the price of goods from 5,000 rubles. up to 4,800 rub. demand increased from 10,000 pcs. up to 11,000 pcs. The elasticity coefficient is -2.35:

ES = (1,000 / (-200)) x ((5,000+4,800) / 2) / ((10,000+11,000) / 2) = -2.35

This product belongs to the classic ones and the demand for it is highly elastic: a decrease in price by 1% leads to an increase in demand by 2.35%.

The advantage of the elasticity coefficient is its ease of calculation. However, this is precisely its drawback. When defining elasticity, an important caveat is made: “other things being equal.” In order to minimize this disadvantage, you can calculate the cumulative impact of several indicators on the amount of demand.

For example, the price elasticity of demand for a certain product is -0.5; demand by income (the coefficient of elasticity of demand by income is calculated similarly to the price coefficient ES = (D K / Ksr) / (D D / Dsr), where D is consumer income) - 0.8. Let us determine by what percentage the volume of demand for a given product will change if its price decreased by 10% and consumer income increased by 20%:

(-0.5)x(-10%) + 0.8 x 20% = 21%.

The combined influence of price factors and changes in income led to an increase in demand by 21%.

Another situation. The rise in price of natural fur leads to a decrease in sales and a shift in demand to products made from artificial fur.

The elasticity coefficient of demand for natural fur with respect to its price is -1.9. When the demand for real fur decreases by 1%, artificial fur increases by 0.9%. Let's calculate the dependence of demand for faux fur products on prices for natural fur:

(-1.9)x(-0.9) = 1.71.

Thus, an increase in prices for real fur by 1% will cause an increase in sales of faux fur products by 1.71%.

When analyzing the consequences of price changes, it is necessary to distinguish between short-term and long-term elasticity coefficients. The short-term elasticity coefficient is based on information obtained during the year, the long-term elasticity coefficient is based on information obtained over a period of more than a year.

The short-term coefficient of price elasticity of demand exceeds the long-term one, as a rule, for durable goods (Fig. 6). Such products are used to replace items used in the household. The total consumer supply significantly exceeds the annual production volume. Consequently, with a sharp rise in prices, the consumer can refuse to purchase durable goods without any noticeable discomfort. However, after some time, there is an urgent need to replace damaged or out-of-fashion household appliances, furniture, etc. This leads to a relative recovery in sales volumes.

As practice shows, it is precisely these curves that most accurately reflect the average sensitivity of buyers to price changes. Therefore, after conducting multiple studies of consumer reactions to price changes and determining the most reliable elasticity coefficients, it is desirable to construct a demand curve with a given elasticity value along its entire length.

The most reliable value of demand elasticity is obtained by calculating the elasticity coefficient at a point close to the equilibrium point. The classification of markets and goods is thus determined by what the characteristics of demand are at the equilibrium point, the point of intersection of supply and demand. This is precisely the purpose of using the arithmetic average values ​​of demand and price in the formula for the elasticity coefficient:

ES = (K / ((K1+K2) / 2)) / (C / ((C1+C2) / 2))

One of the varieties of the demand elasticity coefficient - the cross coefficient - allows you to outline the product (commodity) boundaries of the market that determine.

The definition of product boundaries of the market is based on the concept of equivalence or interchangeability of goods that make up one product group. Substitutability can be calculated using the cross price elasticity of demand:

EShu = (Kx / Ksrkh) / (Tsu / Tssru),
where Kx is the change in demand for product X;
Tsu - change in the price of goods Y;
Ksрх - demand for product X;
Tssru - the price of goods U.

The absolute values ​​of demand and prices are determined as arithmetic averages.

In addition to the quantitative characteristic of the elasticity of demand for product X (low elastic, highly elastic), the cross elasticity coefficient carries important information about the interconnectedness of the selected goods:

If ESkh > 0, then goods X and Y are interchangeable; the higher the elasticity coefficient, the higher the degree of interchangeability;
if EShu
Let us highlight the main factors that determine the level of elasticity of demand:

The more substitute goods there are in the market, the higher the elasticity of demand. When the price of one product rises, the demand for it drops sharply, since it is possible to purchase another, similar product.
Luxury goods have high elasticity, while essential goods have low elasticity.
The higher the share of the budget that falls on the purchase of a given product, the higher the elasticity (this applies to all goods except essential items).
The elasticity of demand decreases as money income increases.
The stability of consumer behavior contributes to a decrease in elasticity.
The less the needs for a given product are satisfied, the higher the elasticity.

The use of the elasticity coefficient in assessing the consequences of price changes for the financial and economic position of an enterprise, taking into account cost differentiation, is illustrated in the following example.

The elasticity of demand from prices for the products of the Beta enterprise is 1.75. Let us determine the consequences of reducing the price by 100 rubles, if before this reduction the sales volume was 10,000 units. at a price of 1,750 rubles/piece, and the total were equal to 10,000,000 rubles. (including permanent ones - 2,000,000 rubles) for the entire production volume.

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Cross elasticity of demand reflects the reaction of demand for a product to changes in the price of a related product. This elasticity indicator helps the manager to assess how much the demand for the analyzed product will increase or decrease due to a change in the price of another product. The coefficient of cross elasticity of demand is calculated by the formula:

After some transformations, the cross-elasticity coefficient, calculated from the average values ​​of price and quantity, will be determined as follows:

The cross elasticity coefficient can be either positive or negative. If Ej(Dj)>0, this means that when the price of the i-th product increases, that is, the demand for the i-th product is directly dependent on the price of the j-th product. A similar dependence arises when goods are interchangeable. For example, as the price of coal rises, the demand for liquid fuel or firewood increases. The higher the positive cross elasticity coefficient, the greater the substitutability of two goods.

If Ej(Dj)<0,то очевидно, что повышение цены на j-й товар вызвало падение спроса на i-й товар. Такая ситуация характерна для взаимодополняющих товаров; например, повышение цен на горнолыжную обувь вызовет снижение спроса на крепления для нее. Чем больше отрицательное значение коэффициента перекрестной эластичности, тем больше взаимодополняемость товаров.

The borderline case of cross elasticity is also possible: Ej(Dj) = 0 or close to zero if the goods are independent of each other and an increase in prices for one product does not in any way affect the change in the quantity of demand for another product. For example, with an increase in the price of bread, the demand for cement will not change. It should be borne in mind that there may not be a reciprocal relationship between the price of one product and the demand for another product, that is, the cross elasticity of demand may be asymmetric. It is obvious, for example, that if the price of meat decreases, then the demand for ketchup will increase; however, if the price of ketchup increases, this is unlikely to change the demand for meat.

Calculation and analysis of cross-elasticity coefficients make it possible to determine whether products belong to a certain type: interchangeable or complementary. This is not always simple, especially if the scheme Pj -Qj concerns the price and demand for a product and a service, that is, P service -Q product.

For example, shoe repairs have doubled in price. In order to find out whether the demand for new shoes will increase, it is necessary to calculate and analyze in dynamics the cross-elasticity of demand for shoes with an increase of 1% in the price of their repair. When Ej(Dj)<0 на протяжении некоторого промежутка времени, очевидно, что обувному предприятию (отрасли) следует планировать производство и ремонт обуви как "одну" продукцию. Если Ej(Dj) окажется равным или близким к нулю, то вероятна их независимость.

In countries with developed market economies, the calculation of the cross-elasticity coefficient is also used to prove that a company does not monopolize the production of any product with a positive Ej(Dj) in the event of an increase in the price of the product of this company and the demand for “similar” products from another company.

To measure the strength of the cross-elasticity coefficient, we use a different definition from the definition of price elasticity of demand. As a business rule of thumb, two goods are considered good substitutes or complementary goods if the coefficient Ej(Dj)>0.5 (modulo, because the coefficient for complementary goods is negative).

Application of cross elasticity of demand

The concept of cross elasticity of demand is particularly useful not only for firm decision making, but also for measuring interdependence between industries.

At the firm level, cross elasticities help shape marketing strategy. For example, a firm must know what changes in demand for its product will cause changes in price and for substitute or complementary products offered by a competitor. In many cases, competition exists “internally,” that is, a firm will produce many types of related products that may be either substitutes or complements to each other. For example, Procter & Gamble makes at least five different types of hand soap and four different types of household cleaning products, all of which compete with each other. The cross elasticities of these products should help in developing pricing strategies that can maximize profits for the firm as a whole. The Gillette company produces both safety razors and blades for them. Since these products are complementary, the company must know how changes in blade prices will affect the demand for razors and vice versa in order to price both products and ensure maximum profit.