DETERMINANTS OF DEMAND ELASTICITY

DETERMINANTS OF DEMAND ELASTICITY:-

As we have discussed in the class there are many determinants of Demand Elasticity:-

Mostly we will discuss about four major determinants of Demand Elasticity

1. Price of own good
2. Price of substitutes / complimentary goods 
3. Income of consumers
4. Advertisements & other promotional measures

Price elasticity of demand (PED) = dQ/dP * P/Q

The formula says "If there is a change in percentage of price by 100% then, it will effect the percentage of  quantity demanded by some %."

Price of own good:-

If the price of the good increases then, the demand of the good decreases.

If the price of the good decreases then, the demand of the good increases.

Therefore the relation between price of the good and demand of the good are inversely proportional.

Eg:- As we discussed in the class if we look at the data projected 

+0.567- If the price raises by 100% then the quantity demanded also raises by 56.7% [+ve PED denotes price is directly proportional to quantity demanded] 

-0.567- If the price raises by 100% then the quantity demanded reduces by 56.7% [-ve PED denotes price is inversely proportional to quantity demanded] 

If the value of PED lies between 0 and -1 then, in all such cases the product is to be called as price inelastic. 

If the quantity demanded is more than proportionately change than the change in price it is inelastic.

If the value of PED is <-1 then, in all such cases the product is to be called as price elastic. 

Ex: High-end cars, Paintings, Jewellery, Costly House - these type of goods are called as veblen goods which are having positive elasticity. 

Price of Substitute and Compliments:-

Generally it is called as cross price elasticity of demand (CPED).

If the cross price elasticity of demand is +ve then it is related to Substitutes and if it is -ve then it is related to compliments.

Ex:- 

SUBSTITUTES

• If price of the tea increases then the quantity demand of the coffee is increased.
• If the price of ola is changed then, the quantity demand of uber is effected.
• Similarly in the case of pepsi and Cococola.

COMPLIMENTS

• If price of the petrol increases then the demand for usage of vehicles gets effected.
• If rates of electricity raises then the demand for bulbs and fans get effected.

In all the above cases the price of one good is effecting the quantity demand of the another good.

Income of consumer:-

It is denoted by Ied

If income of consumer raises by 100% then the factors like Food, Beverages, Housing, Clothing, Footwear, Transport, Medical & Health, Tobacco ...etc will get effected by some percentage.

Generally Ied will be positive only except in case of Inferior goods.

If Qd respond more proportionately than change in price then, it is called as Inelastic.[Ied lies between 0-1]

If Qd respond less proportionately than change in price then, it is called as Elastic.[Ied is >1]

Advertisements and other Promotional Measures:-

Generally the sales of a company is measure by number of footprints in the company.

The company measures the impact of advertisements basing on the foot prints.

They will calculate number of sales before advertisements and after advertisements. So that the impact of promotions can me quantified.

If there is 60 sales & 85 sales, before advertisements and after advertisements respectively then the impact of promotions is 25 extra sales.