Price elasticity of demand
Price elasticity is a measure of relative change which results in the supply or demand quantity, if a relative price change occurs. The higher the price elasticity, the more responsive the quantity to the changed price. The price elasticity of total market tends to be lower than the elasticity of a single good, the exchanged at a price change for a different ( substituted ) can be.
A special form of price elasticity is the cross-price elasticity, in which is shown how the price change of a property to the amount of change of another good effect.
In principle, the influence of the demand and the supply quantity can be distinguished in the elasticities, which is why four elasticities designate more precisely in its entirety. If the price elasticity called without specifications, the direct price elasticity of demand is usually meant.
- Price elasticity of demand
- Price elasticity of supply
- Cross-price elasticity of demand
- Cross-price elasticity of supply
In the indirect or cross - price elasticity of demand is to distinguish whether it is complementary or competing products (see Geml / Lauer, 2008, p 261). If the price of a product is reduced, the demand for a Komplementärgut or the rate decreases at a rival product or Substitutionsgut. Furthermore, a distinction is made between short-term and long-term elasticity. Since by technical progress is possible, eg, to adapt to certain changes in prices, the long-term price elasticity for many goods, but not in all, more than the short-run price elasticity.
- 3.1 Quantitatively
- 3.2 Competitive ( Triffinischer coefficient)
- 6.1 Price reduction
- 6.2 Price Increase
- 6.3 Function describes quantity change 6.3.1 solution
- 6.3.2 Maximum sales price determination using the elasticity
Definition
The price elasticity is defined as the relative amount of change ( of the goods offered at this price in the market) divided by relative price changes. We distinguish here different approaches.
Arc elasticity
With the price and the quantity, where the old price and the new mean, analog,
One can interpret this elasticity as approximate average relative change of Q.
Averaging method
It is a variant of the elastic sheet, wherein the changes are not analogous to a fixed value, or be related, but rather on the composition of and. This gives then
Elasticity function
It is an infinitesimal ( infinitely small ) change in the price p is considered with respect to a price-demand function here. For the areas in which p ( x) and defined, and in which p ( x) is differentiable, the elasticity function yields
If the sales function is known simply results
Categorization
The possible elasticities are to be displayed. The examples cover, unless otherwise stated, always the effect of a price change on the quantity demanded.
Typically the elastic coefficient, a negative sign is observed, there is always a dividend is negative. Thus causes a price reduction usually an increase in sales, with a price increase has a sales decline of pressure. Only in the case of abnormal elasticity, as can occur in luxury goods or hoarding, the elasticity coefficient is positive. This can already be inferred from the sign to draw conclusions about the nature of the investigated material.
Quantitatively
The extent to which the price affects the quantity change in supply and demand?
However, the price elasticity of demand of a particular commodity can not be positive for each price level; this would require the presence of infinite financial resources among the buyers.
Competitive ( Triffinischer coefficient)
The use of the cross-price elasticity as an indicator of the strength of competing companies goes back to Robert Triffin. After calculating the cross-price elasticity of demand, the following Triffinischer coefficient e, there are three forms of competition:
E = infinity - > homogeneous competition: Lowers Manufacturer A the price of its milk infinitesimal, the sales volume of milk from producer B drops drastically.
Application
In the competition for the most accurate assessment of consumer behavior in marketing the observation of the price elasticity of demand in shaping a strategic pricing policy helps. Unlike operating price measure, for example, serve the short-term sale of seasonal merchandise or management of competitive action, knowing the price elasticity of demand in the market has a strategic importance. It is recognized, among others, from which market price, an increase in prices, the quantity sold decreases so much that the total turnover is less than before the price increase. Even in the event that the sales of a product or service falls short of expectations, can be defined by means of elasticity, whether a price reduction makes sense.
The price elasticity can be used as a measure for the control in the Company, to capture the stability of their own prices fluctuations in demand.
In the economic context, the price elasticity is used for calculation of tax revenues. The higher the elasticity, the more likely the taxed good is after a tax increase no longer be consumed. The control therefore has a Steering consumer behavior to the target ( see also steering control ). If the elasticity is low, however, the control has the character of a revenue tax.
Examples of empirically determined price elasticities of demand
In theory, " luxury goods " a high price elasticity of demand, " necessities ", however, a low price elasticity of demand. That is, as Artur Woll, confusing at first, since the Elastitzität demand along the demand curve can have any value from zero to infinity. In fact, the empririsch determined case of different goods elasticities do not scatter in this whole width, but usually in a narrow range. There was therefore a "typical " elasticities for certain items which vary however according to space and time.
Thus, the economic historian Hans -Heinrich Bass estimated the price elasticity of demand for food grain ( rye) in Prussia in the first half of the 19th century with the data of the milling and slaughter tax to a value of -0.2. After Gollnick the price elasticity of demand was for bread and bakery products in Germany between 1950 and 1970, however, -1.8. The theoretically "expected" value of the price elasticity for this " necessary good" cereal comes closer the estimated value of bass. Maybe, but the elasticity has simply shifted in the course of a century
Examples
Price cut
A company changed the price of a product from the current 60 to 50 euros. This has the consequence that the sales volume from the current 3,000 rising to 4,000 pieces.
Percentage increase in sales
Percentage price reduction
Price elasticity
Demand is thus (very) elastic.
Price increase
A dealer increases the price of a branded jackets from the current 100 to 105 €. This has the consequence that the demand from the current 10 drops to 9 pieces.
Percentage decline in sales
Percentage price increase
Price elasticity
Demand is thus (very) elastic.
Function describes quantity change
A relationship which is represented by the following function exists between a quantity m and the market price p:
What is with the coefficient of elasticity?
Solution
In this task, no percentage changes are given, from which could be calculated using the arc elasticity coefficient of elasticity. It will therefore be made of the above-mentioned elasticity also function. It is to first form the derivative of the Preis-/Mengenfunktion.
Next, the expected amount computed for a price of.
The first derivative of Preis-/Mengenfunktion well as the price and the calculated quantity can now be used in the elasticity function:
Maximum sales price determination using the elasticity
Due to the nature of the price elasticity and its course can be with their help also calculate the revenue -maximizing price. Effected by exposing the price elasticity to a certain demand - as usual in absolute value - equal to 1
( In general, the demand curve is decreasing and thus. ) If one now, this formula resolves to p, we obtain the maximum sales price for the given price-demand function.