The price elasticity of demand is an economic variable. This key figure is used to determine how a price change by market providers affects consumer demand. Price elasticity of demand means that there is little or no decline in consumer demand if a provider only increases prices slightly. If the market is elastic, can companies generate higher revenue.
Price elasticity of demand
This lesson covers the price elasticity of demand. You will find out which statement is associated with price elasticity and which requirements must be met for an inelastic demand. After we have presented you with a calculation example for determining the price elasticity, you will finally be informed about the differences between the short-term and long-term price elasticity. To deepen your knowledge, you can answer a few exercise questions after the text.
English: price elasticity of demand
Which statement is associated with the price elasticity of demand?
According to topbbacolleges.com, the price elasticity is primarily used to analyze the behavior of consumers for a specific product. The aim is to determine how consumers react when suppliers raise their prices.
What does cross price elasticity mean?
The cross price elasticity relates to two different products. If the value of the cross price elasticity is high, a direct connection between the two products can be established. On the other hand, if it is zero, there is no connection between the two products in terms of demand.
When is the demand inelastic?
A price elasticity does not necessarily have to be present. It can also be an inelastic demand. Consumer demand is 100% inelastic when it is zero. At this stage , demand does not respond to price changes at all. Regardless of whether these increase, decrease or the price remains the same, consumers always ask for the same amount. This can be determined e.g. B. when buying medicines or food that are urgently needed.
The calculation of price elasticity
The price elasticity is determined using the price elasticity formula.
To do this, the following two variables must be known:
- Change in the amount requested in percent
- Change in price in percent
Price elasticity is calculated by dividing the percentage change in demand by the percentage change in price.
The price for a case of wine will be increased from € 60 to € 75. Consumers react to this with a drop in demand. Instead of a quantity of 200, only 100 orders can be accepted after the price has increased.
The increase in the price from € 60 to € 75 means a price increase of 25%. The drop in demand from 200 to 100 means a 50% drop in demand.
If the result is above 1, consumer demand is elastic. So the demand for wine is dropping immensely.
Differentiation of short-term and long-term price elasticity?
When determining price elasticity, a distinction must be made between short-term and long-term price elasticity.
If a supplier sells his products for a long time at a high price, the customers react differently. You have more time to decide whether or not to buy the product. Some refrain from purchasing a product after the price increase. Others hesitate, but then buy. Because they urgently need the products, they accept the higher price.
In many cases, the short-term price elasticity shows a lower demand than the long-term price elasticity. However, when it comes to durable products – e.g. B. a car – it is exactly the other way around. In this case, the short-term price elasticity of consumers is higher than the long-term price elasticity. This can be justified by the fact that even long-lasting products must be replaced at the latest when they can no longer be used due to age and wear and tear.