Glamor Economics

Chapter 27

Chapter 4, Section 8 Why there are exceptions to small profits but quick turnover——Price Elasticity of Demand

The price elasticity of demand, also known as the elasticity of demand, measures the responsiveness of quantity demanded to changes in its price.If the quantity demanded of a good responds large to a change in price, the demand for that good is said to be elastic.Conversely, demand is inelastic.The formula can be expressed as:
Price Elasticity of Demand = Percentage Change in Quantity Demanded/Percentage Change in Price
When the elasticity is greater than 1, the demand is elastic; less than 1, the demand is inelastic; equal to 1, the demand is unit elastic; equal to 0, the demand is completely inelastic.In our real life, there are many commodities that are inelastic, such as food.Nowadays, no matter in the streets or alleys, we always see words such as "big sale", "jump price", "massive bloodletting", but we rarely see discounted sales of commodities such as grain, and the lack of flexibility is the main reason.

From life, we can also get such an experience that the demand for necessities is inelastic, while the demand for luxuries is elastic.For example, when the price of doctor visits increases, although people will visit the doctor less often than usual, it will not change the number of times they visit the doctor substantially.Similarly, the demand for daily necessities such as wheat and rice will not change much due to changes in prices.On the contrary, when the price of yachts rises, the demand for yachts will decrease significantly, because most people regard wheat and rice as necessities and yachts as luxuries.Similarly, some jewelry or brand-name clothing can easily lead to panic buying because of price cuts, which is also because jewelry and brand-name clothing are luxury goods.

In addition, goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from such goods to other goods.For example, CD players and MP3 players can easily replace each other.When the price of the former rises, it can easily lead to an increase in the demand for the latter.

Furthermore, items tend to have more elastic demand over time.When gasoline prices rise, demand for gasoline falls only slightly in the first few months, but over time people buy more fuel-efficient cars, switch to public transportation, or move closer to work.Within a few years, the demand for gasoline will drop dramatically.

Demand elasticity has a great impact on business marketing.For example, enterprises that produce beverages must be very cautious about price adjustments.Because the demand for beverages is very elastic.The prices of similar beverages will not vary too much. If the price of a certain beverage suddenly increases, customers will switch to similar beverages of other brands, and customers will lose quickly.For such a product with many substitute products and high demand elasticity, a price increase will lead to a rapid change in sales.

If the commodity demand elasticity is small, the supply side of the commodity raises the price, the demand decreases slightly, and the income will increase; conversely, the price decreases, and the income will decrease.If the commodity is elastic, the supply side raises the price, the demand decreases greatly, and the income will decrease; conversely, the price decreases, and the income will increase.Therefore, the supply side must take into account the price elasticity of commodities when setting prices. If the elasticity is low, the price may be raised, and if the elasticity is high, the price may be lowered.

[links to related words]

Compared with elastic demand, rigid demand refers to the demand that is less affected by price in the supply and demand relationship of commodities. These commodities include daily necessities, household durable goods, etc., and can also be understood as common commodities and necessities in people's daily life.

(End of this chapter)