What is Price Elasticity of Demand?

Demand price elasticity refers to the sensitivity of market demand for goods to price changes. It is usually expressed as the ratio of the percentage change in demand to the percentage change in price, that is, expressed by the elasticity of demand price. The calculation formula is divided into point elastic formula and arc elastic formula. The main factors affecting the elasticity of product demand are: (1) the importance of products to people's lives. Usually, the elasticity of demand for necessities is small and the elasticity of demand for luxury goods is large. (2) Substitution of goods. The elasticity of demand for difficult-to-substitute products is small, and the elasticity of demand for easily-replaceable products is large. (3) how many products are used. The elasticity of demand for a single application is small, and the elasticity of demand for a wide range of applications is large. (4) The popularity of the product. The demand for products that have been popularized and saturated in the society is low, and the demand for products with low popularity is high. (5) Product unit price. Demand for small daily commodities is small, and demand for high-end consumer goods with large prices is large. (6) Demand affects prices ^[1]

Demand price elasticity

Demand price elasticity refers to the sensitivity of market demand for goods to price changes. It is usually expressed as the ratio of the percentage change in demand to the percentage change in price, that is, expressed by the elasticity of demand price. The calculation formula is divided into point elastic formula and arc elastic formula. The main factors affecting the elasticity of product demand are: (1) the importance of products to people's lives. Usually, the elasticity of demand for necessities is small and the elasticity of demand for luxury goods is large. (2) Substitution of goods. The elasticity of demand for difficult-to-substitute products is small, and the elasticity of demand for easily-replaceable products is large. (3) how many products are used. The elasticity of demand for a single application is small, and the elasticity of demand for a wide range of applications is large. (4) The popularity of the product. The demand for products that have been popularized and saturated in the society is low, and the demand for products with low popularity is high. (5) Product unit price. Demand for small daily commodities is small, and demand for high-end consumer goods with large prices is large. (6) Demand affects prices ^[1]

In mathematical terms:

when

Price elasticity of demand (referred to as price elasticity or demand elasticity). Price elasticity of demand refers to the degree of response of demand to price changes. It is the percentage of change in demand divided by the percentage of price change.

Relationship between demand price elasticity and total sales revenue:

The purpose of elasticity theory is to account for price changes

Policy implications of price elasticity of demand: If demand is elastic, after price increases

Factors affecting the price elasticity of demand:

(1) Whether the commodity is a necessity or a luxury. The elasticity of necessities is small, and the elasticity of luxury goods is large.

(2) The more items that can be replaced, the closer the properties are, the greater the elasticity, and vice versa. Such as woolen fabrics can be replaced by cotton fabrics, silk fabrics, chemical fiber products.

(3) The expenditure on the purchase of goods accounts for a large proportion of people's income, and the elasticity is large; if the proportion is small, the elasticity is small.

(4) Product

Examples of application of demand price elasticity

Analysis and estimation of prices and sales

Example 1. In order to encourage the development of the country s petroleum industry, a country adopted measures to restrict oil imports in 1973. It is estimated that these measures will reduce the amount of available oil by 20%. How much is expected to rise in the country's oil prices since 1973?

Solution: Price elasticity of demand = Percentage change in demand / percentage in price

% change in price =% change in demand / price elasticity of demand

When the price elasticity is 0.8, the price change% = 20% / 0.8 = 25%

When the price elasticity is 1.4, the price change% = 20% / 1.4 = 14.3%

Therefore, it is predicted that the country's oil price increase in 1973 will be between 14.3-25%.

For decision analysis

Price elasticity is useful for some economic decisions. For example, how do you price exports? If the purpose of exports is to increase foreign exchange income, a lower price should be set for materials with greater price elasticity, and a higher price should be set for materials with less elasticity. For another example, in order to increase the income of producers, people often adopt a price increase method for agricultural products and a price reduction method for high-end consumer goods such as televisions, washing machines, and watches, because the former is less flexible and the latter is more flexible.

Used to analyze the economic phenomenon of "inferior farmland"

Case: Some people say that bad weather is bad for farmers, because poor cereal harvest will reduce farmers' income. However, some people say that a bad climate is good for farmers because grain prices will rise after poor agricultural harvests, which will increase farmers' income. Try to use the principles of economics to evaluate these two statements.

Analysis: Evaluating whether a bad climate is beneficial to farmers depends mainly on how the farmers' agricultural income changes when the climate is bad. The direct impact of bad weather on farmers is the poor harvest of agriculture, that is, the supply of agricultural products is reduced, which is reflected by the supply curve of agricultural products moving to the upper left. If the market demand for agricultural products does not change at this time, that is, the demand curve remains the same, then a decrease in the supply of agricultural products will lead to an increase in the equilibrium price.

Generally speaking, people's demand for agricultural products is inelastic. From the relationship between the price elasticity of demand and the increase in total sales income, we can see that at this time farmers' agricultural income will increase with the rise in equilibrium prices. Therefore, under the condition that the demand situation does not change due to the bad climate and the lack of elasticity to the demand for agricultural products, the poor agricultural harvest caused by the bad climate is beneficial for farmers to increase their income. Of course, if demand conditions change at the same time, or if demand is not inelastic, farmers will not get more income because of bad weather. According to the above analysis, the answer to this question should first make assumptions about the demand elasticity and demand conditions of agricultural products, rather than making general judgments.