In economics, the price elasticity of demand (PED) is a measure of the quantity of goods demanded (quantity of goods purchased by buyers) against changes in the price of goods. Generally, the elasticity of demand occurs when the price of a commodity increases, the desire of buyers to buy that commodity will decrease.
However, the rate of change is different: for some goods, a slight increase in price will cause a sharp decrease in demand, while for others, even though the price has risen sharply, the buyer is still willing to buy. In economics, this difference is measured as elasticity.
More specifically, the elasticity of demand represents the percentage change in quantity demanded when the price increases by 1% and all other conditions remain the same. Since the quantity demanded almost always falls as the price rises, the elasticity of demand is usually negative, although practitioners sometimes do not write a negative sign.
If the elasticity of demand for a commodity is greater than 1, then the demand for that commodity is said to be elastic. This means that a 1% increase in price will cause a decrease in demand of more than 1%. On the other hand, inelastic demand refers to demand whose elasticity is less than 1.
In addition, there is a classification of full elastic demand with unit elasticity ∞ elastic (elasticity 1), complete inelasticity (0), and complete elasticity (∞). Some commodities have positive elasticity, so they are not in accordance with the law of demand, for example commodities with status symbols (“Veblen commodities”) or Giffen commodities.
In economic theory, when prices are adjusted, the seller’s income reaches its highest point, so that the elasticity of demand is uniform (1). Demand elasticity can also be used to predict the impact or tax burden on commodities. There are many ways to measure the elasticity of demand in the real world, including analysis of sales records, models generated by consumer surveys, and comprehensive consumer reference level analysis.
Factors Affecting the Elasticity of Demand
The elasticity of demand itself cannot be changed, each commodity has its own characteristics, so it is influenced by demand and price decisions to form market equilibrium. Factors that affect the elasticity of demand for commodities are:
- Availability and capability of alternative commodities.
- The intensity of demand for each project is different, so the elasticity category is also different, for example, the elasticity of the main demand and the third demand is different.
- Consumer income. If the income of consumers is relatively large compared to commodity prices, the demand will be inelastic.
- It has become a habit. Even if the price of goods goes up, buyers will still buy.
Determinants of Demand Elasticity
The main factor determining the elasticity of demand is the ability and willingness of consumers to delay consumption or seek alternatives when prices change. In addition, this ability or willingness can be analyzed as a number of factors:
Availability of spare parts
The more substitutes available, the more elastic the demand tends to be, because buyers can buy other goods even if the price changes slightly. This is called the substitution effect, and has a major impact on elasticity. If there are no suitable substitutions, the substitution effect will be smaller, and demand will often be inelastic.
Percentage of Buyer Income
When the price of a product is measured as a percentage of the buyer’s income, the higher the price, the higher the elasticity, because buyers are more careful when buying this product. This effect is called the income effect and is quite large. Items that are small expense items often have inelastic demand.
The more important the demand for a product, the less elastic the demand will be, because buyers will buy it, regardless of price. An example is giving insulin medication to people who need it.
Generally, the longer the change in commodity prices lasts, the higher the elasticity, because consumers have the time and willingness to change their consumption behavior. For example, if the price of fuel oil (BBM) rises, consumers will still need it in the short term and buy it in the same amount. However, if high prices continue for a long time, consumers will look for ways to reduce fuel demand, such as by using public transportation or buying a more fuel-efficient vehicle.
Brand loyalty will reduce sensitivity to price changes, thus making demand inelastic. This loyalty may be out of habit or an obstacle to changing brands.
If the purchase is paid for by another party, the demand is often inelastic, for example the official costs borne by the company or the state.
Addicting or addicting goods often have inelastic demand, because even if prices change sharply, addicted consumers are “forced” to buy. For example cigarettes, alcohol or heroin.
The degree of definition of the item under test
The value of the elasticity of goods depends on the definition of the goods being measured. For example, a food menu in a restaurant (narrow definition) has high elasticity due to many substitutions (eg other types of food or other restaurants), whereas if general (generalized) menu measurements are made, the elasticity is small because there are no substitutes.
An example of the elasticity of demand
Demand elasticity measures the sensitivity of changes in the quantity of a good demanded to changes in price. When the price of a commodity falls, the demand for that commodity usually increases. The lower the price, the more items you can buy. The elasticity of demand is expressed as the ratio of the percentage change in quantity demanded to the percentage change in price.
When the elasticity of demand for a good shows a value greater than 1, the demand for that good is considered elastic, in which the quantity of goods demanded is strongly influenced by the price. Meanwhile, a commodity with an elasticity of less than 1 is called an inelastic commodity, meaning that the price of the quantity demanded will not be too affected.
For example, if the elasticity of the demand for motorbikes is 2, then because the elasticity value is greater than 1, then motorbikes are classified as elastic merchandise. Therefore, it can be said that the demand for motorbikes is strongly influenced by the selling price.
Conclusion of the Elasticity of Demand
Taxation can also affect the elasticity of demand through direct taxes and indirect taxes. An increase in taxes causes a change in market equilibrium, which increases the total price of these goods, while the quantity demanded decreases.
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