Chapter Four Analysis of Demand Elasticity and Supply Elasticity

demand elasticity

• Demand elasticity: the sensitivity of the demand for a commodity to changes in its influencing factors; demand elasticity can reflect the change in demand when a certain factor changes

• Common demand elasticity: demand price elasticity, demand income elasticity, demand cross elasticity

• Price elasticity of demand: The degree to which a change in the quantity demanded of a good responds to a change in its price
  

• The formulas for calculating the price elasticity of demand arc arc elasticity and point elasticity are as follows:
  
  

Types of price elasticity of demand

• Completely inelastic; the elastic coefficient is 0, which is closer to salt
  

• Demand is inelastic; elasticity coefficient < 1, necessities of life
  

• Unit Elasticity of Demand; Elasticity Coefficient = 1
  

• Demand is elastic; elasticity coefficient > 1
  

• Demand is perfectly elastic; coefficient of elasticity = ∞
  

The main factors affecting the price elasticity of demand

• The substitutability of commodities; the greater the variety of substitutions, the greater the price elasticity
• The breadth of commodity use; the stronger the breadth, the greater the price elasticity
• The importance of the product to the life of the consumer, the more important the less
• The share of consumer spending on goods in total consumer budget spending; the greater the share, the greater the elasticity
• The time it takes for the consumer under consideration to adjust the quantity demanded; the longer the time, the greater the elasticity

In addition, the income level of consumers, the level of commodity prices, and the level of education of consumers will all have a certain impact on the price elasticity of demand for commodities.

Price Elasticity of Demand Applications

When elasticity = ∞, the price increase will lead to a decrease in income, and the enterprise will not reduce the price

income elasticity of demand

• Income elasticity of demand: The degree to which a change in the quantity demanded of a commodity responds to a change in income, calculated as follows:
  

The arc elasticity takes the midpoint A+B/2, and the point elasticity calculates the derivative

Types of income elasticity of demand

• =0; inelastic, no response to changes in income, the closest one is table salt
• Greater than 1; elastic, income increases or decreases, the demand for the product will increase or decrease significantly, high-end consumer goods and luxury goods
• =1, unit elasticity, income increase or decrease is equal to demand increase or decrease, clothes
• <1, lack of elasticity, income increases or decreases, the demand for the commodity will increase or decrease to a small extent, necessities of life
• <0, negative elasticity, income increases, demand decreases, fatty meat, potatoes, public transportation, etc.

Engel's Law: The share of income that a household or a nation spends on food decreases as income increases

The formula of Engel's law:
Income elasticity coefficient of food expenditure = amount of food expenditure / total expenditure (or amount of total income)

Income Elasticity of Demand Applications

• An important basis for enterprises to determine the direction of product structure adjustment, and an important basis for the country to determine the direction of industrial structure development
  • The period of high-speed economic growth of the country: the income elasticity of demand increases greatly, the income elasticity of demand increases slightly, and the output of low-end consumer goods decreases
  • The country's economic downturn: reduce the production of high-end goods, the necessities of life can be slightly reduced, and the production of low-end goods can be increased in time

cross elasticity of demand

• Cross-elasticity of demand: The degree to which a change in the quantity demanded of a commodity responds to a change in the price of a related commodity, calculated as follows:
  

Types of cross elasticity of demand

• Greater than 0, there is a substitution relationship between x and y
• Less than 0, there is a complementary relationship between x and y
• Equal to 0, no relationship between x and y

Applications of Cross Elasticity of Demand

• Substitutes are produced by different companies, and the cross-elasticity of demand is used to analyze the competitive relationship between products: the bigger the competition, the more intense the competition
• The cross-elasticity of demand is negative, and the products are complementary, and the complementary products are divided into main products and supporting products; usually, the pricing strategy is to set low prices for the main products and set high prices for supporting products

supply elasticity

• Price elasticity of supply: The degree to which a relative change in the quantity supplied of a commodity responds to a relative change in its price within a certain period of time. The formula is as follows:
  

Price Elasticity of Supply Classification

• Equal to 0, inelastic; precious works of art, antiques, etc.
  

• Greater than 0 and less than 1, lack of elasticity, agricultural products
  

• Equal to 1, unit elasticity

• Greater than 1 and less than ∞, full of elasticity; general crafts

• ∞, supply is infinitely elastic

Main Factors Affecting Supply Elasticity

• The length of production time of goods, the longer, the greater the elasticity
• Production cycle, long cycle, small flexibility
• The scale of production and the ease of scale change, the larger the scale, the less elastic
• The production cost changes, the change is large, and the elasticity is small.
  The characteristics of the commodity itself also affect the elasticity of commodity supply.