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Elasticity of supply and demand

The ability of one economic variable to respond to changes, occurred in another economic variable, called elasticity.

Quantitatively, the elasticity is measured by, which is called the coefficient of elasticity (E).

Elasticity coefficientthe response of one variable to changes in another, expressed as the ratio of percentage changes. In other words, elasticity coefficient is the ratio of the percentage change in one variable to percentage change in another.

Distinguish elasticity of demand by price, income and cross elasticity. Let us consider each of them.

For elastic demand reduction prices 1 % causes more significant increase in demand (sale), therefore, sales revenue grow.

For inelastic demand reduction prices 1 % leads to growth of demand is less than, than 1 %, therefore, the total revenue from sales decreased.

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For a unit elastic demand the price change causes exactly the same change in demand, therefore, the total revenue from sales remains unchanged.

On the last two situationsth is completely inelastic and completely elastic demand — law of demand does not apply. These extremes are not so practical, as the theoretical value, although sometimes absolutely inelastic demand. An example is insulin for insulin-dependent diabetics or anti-asthma drugs for asthmatics. We are talking about goods, which are critical to the viability, the price does not limit the demand. It may limit only the income of the consumer.

Much harder to give an example of absolutely elastic demand. Economic theory describes such a situation, when a decrease in price leads to a reduction in the demand for goods, and the increase in prices — increase. This situation is called the effect of G. The Ghiffa, and the goods, demand responds to price change, — goods G. The Ghiffa (English economist G. The Giffen first investigated this effect). The demand curve for goods G. The Ghiffa would have no negative, a positive slope.

In order to describe the influence of the factors on elasticity of demand price, consider the structure of the goods according to their sensitivity to price changes. For this purpose from the General mass of goods needs to identify the interchangeable goods (the goods-substitutes) and complementary goods (goods-compliments).

Interchangeable goods is the goods, which can satisfy the same need independently from each other. (For example, the need for fats can be met or sunflower oil, or margarine.)

Complementary goods is such goods, consumption one of which necessarily requires the consumption of other. (For example, the use of useful properties of the car is impossible without the use of oils, gasoline, brake fluid and the like.)       

The goods-substitutes and goods-complements respond differently to price changes of the coupled product.

For substitute products the rise in the price of one commodity causes a rise in the volume of demand for another (pair) item. The increase in the price of oil will lead to increased consumption of margarine.

For goods-complements the rise in the price of one commodity is accompanied by a decline in demand for the other (related) item. The increase in the price of gasoline will make the car owner less to use, and not only consume less gasoline, but oils and other related products.

Factors, affecting price elasticity of demand

The importance of the product for the consumer. Goods, without which the consumer cannot do, inelastic price. Essentials of plastichny, and luxury items is elastic.

The availability of substitute products. Than greater the number of substitute products available to the consumer, the more elastic will be the demand for a product is the substitute, the price which varies, and Vice versa.

The importance of goods-complements in the overall consumption pattern. So, the increase in electricity prices may affect the reduction of consumer demand on electric pumps to a greater extent, than lubricants for pumps.

The time factor. In the long term the demand for goods is elastic, than short term, such causes:

and) the reaction of consumers to changes in prices of goods, consumption of which has been the traditional and long, requires a certain adaptation period. For example, Ukrainian family traditionally used to eat more pork, than poultry, therefore, the predominance of the latter in consumption cannot occur simultaneously, and will gradually;

b) the entrepreneur also cannot instantly respond to the increase in the price of a certain product and to offer consumers Tova-ry-substitutes, since the production of substitutes takes time;

in) long-term changes in the price of the goods, consumption which occupies a considerable share in the income, takes a long time to find an alternative source. For example, the limitations of conventional fuel for thermal power plants and rising prices forced them to resort to the use of fuel for nuclear power plants, requiring thorough research.

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