Price elasticity of demand

Another important aspect of buyer behaviour relates to what economists call the price elasticity of demand.

Price elasticity of demand measures the responsiveness of the quantity demanded of a product to a change in price.

There are three types of elasticity of demand. Demand that is elastic Demand that is unit elastic Demand that is inelastic

Elastic demand

Demand is relatively elastic if the quantity of a particular good or service demanded changes more than proportionally with the change in price.

For example, a 10 per cent increase in price results in a 20 per cent fall in quantity of goods or services demanded.

In this case, the total revenue (Price x Quantity) decreases if demand is elastic and prices increases.

Elastic product is highly responsive to changes in price.

Unit Elastic demand

Demand is of unit elasticity if the quantity demanded changes by the same proportion as the change in price

For example, a 10 per cent increase in price results in a 10 per cent fall in quantity demanded.

Here, the total revenue remains unchanged with an increase in price.

Inelastic demand

Demand is relatively inelastic if the quantity demanded changes less than proportionally to the change in price

For example, a 10 per cent increase in price results in only a 5 per cent fall in quantity demanded.

In this instance, total revenue increases following an increase in price.

Inelastic product is highly unresponsive to changes in price.

Factors that determine price elasticity of demand

Type of item. The demand for necessities is normally

relatively inelastic, while demand for non-necessities are usually relatively elastic.

Factors that determine price elasticity of demand

Availability of Substitutes The demand for products with many

possible substitutes is usually fairly elastic, while that for unique products is quite inelastic.

Factors that determine price elasticity of demand

Proportion of income Expensive things representing a high

proportion of household spending tend to have a more elastic demand, while cheaper items representing a lower percentage of our spending have a more inelastic demand.

Factors that determine price elasticity of demand

The time period. Time has an effect on elasticity. In the

long term, the demand for most things tends to be more elastic than in the short term when demand is more inelastic.

Time gives buyers the opportunity to find alternatives or substitutes.

Factors that determine price elasticity of demand

Influence of advertising Advertising is designed to increase brand

loyalty. Successful advertsiing will enable consumers to associate lifestyle or image with a product.

If firms are able to successfully create a sense of brand loyalty than this makes their competitors’ products less viable as alternatives.

Therefore a successful advertising campaign can decrease the elasticity of demand and make the product more inelastic.