Elasticity of supply and demand
Such economic indicators as demand,offer and price are among the main elements of the market. It is their interaction that forms a market mechanism that can be represented in the form of an association of sellers and buyers for the formation of demand and the supply of goods.
So, demand is determined by a certain amountproducts, the purchase of which each specific buyer has its own price from similar indicators for a certain period of time. The main points in this definition are: the availability of a specific price scale and a certain time interval. Due to price changes, demand is changing. It is this formulation that determines the law of demand.
The sentence can be represented in the forma certain quantity of products that the business entity is ready to produce for further sale at a certain price from a specific range of prices within a certain time interval.
The existing law of supply is able to showdirect dependence of changes in supply on prices. In other words, rather high prices help the manufacturer to offer more of its products, and low ones, on the contrary, less. When deciding on the production of a specific product, the business entity must constantly compare the price per unit of the product with its cost price.
The term "supply and demand elasticity"price "is directly related to the demand for certain products, depending on the level of their price. That is why the price elasticity of supply and demand shows the degree of dependence of consumers on price changes. To measure it, use the appropriate coefficient.
The coefficient of elasticity can show how much the demand for products will change, if its price changes by 1 percent.
Elasticity of supply and demand can be calculated by the following formula:
Ep = (-ΔQd (%)) / (ΔP (%)),
where Ep is the elasticity of supply and demand relative to the price;
ΔQd - change in demand or supply (relative value in percent);
ΔP - price change (relative value in percent).
If we represent the relative quantities in the form of the corresponding formulas, then the elasticity of supply and demand can be calculated as follows:
Ep = ((Q1 - Q0) / (Q1 + Q0)): ((P1 - P0) / (P1 + P0)),
where Q1, Q0 - the demand or supply before and after the price change;
P1, P0 - the price taken also before and after the change.
When the price increases, the demand volume gradually decreases. To avoid negative values in this formula, the value of the coefficient must be taken modulo.
With the elasticity of supply and demand, greaterunits, the increase and decline in demand or supply occurs faster than the price. The value of this coefficient is less than one means the inelasticity of demand, in which the decline or increase in demand and supply is slower than the change in price.
The coefficient equal to one is an ideal option for any economy, characterizing the overall balance of all economic processes in the state.
Also in theoretical studies there arethe concept of "absolute inelasticity" (if the price changes do not involve any changes in the supply or demand, the coefficient is 0), and "absolute elasticity of supply and demand" (with a sufficiently small price change, the supply and demand expands indefinitely) .
Consideration of the elasticity coefficient would be incomplete if one does not pay attention to the factors that influence the elasticity of supply and demand, namely:
- the existence of analogs (the more substitutes for the original product, the more elastic the demand for it);
- the specific weight of the consumed goods (the lower the specific weight, the lower the elasticity of demand and supply);
- the amount of income;
- product category (whether it refers to luxury goods - demand is elastic, or to items of prime necessity - inelasticity of demand is observed).
