Price elasticity of demand

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Price elasticity of demand (demand elasticity) is the measure used in the economy to indicate the responsiveness or elasticity, the quantity demanded of a good or service against a price change when it does not exist but a change in price. More precisely, it gives a percentage change in the amount requested in response to a one percent price change.

Price elasticity is almost always negative, although analysts tend to ignore the mark even though this can lead to ambiguity. Only items that are not in accordance with the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, demand for goods is said to be inelastic (or relatively inelastic ) when PED is less than one (in absolute value): that is, a change in price has a relatively small effect on quantity of goods requested. The demand for the item is said to be elastic (or relatively elastic ) when its PED is greater than one.

Revenue is maximized when the price is set so PED is absolutely right. The PED of an item may also be used to predict the tax incident (or "expense") of the goods. Various research methods are used to determine price elasticity, including test market, historical sales data analysis and conjoint analysis.

Video Price elasticity of demand

Definisi

Variasi permintaan sebagai respons terhadap variasi harga disebut elastisitas harga permintaan. Ini juga dapat didefinisikan sebagai rasio persentase perubahan permintaan (Q) terhadap perubahan persentase harga (P) komoditas tertentu. Rumus untuk koefisien elastisitas harga permintaan untuk suatu barang adalah:

${\ displaystyle e _ {\ langle p \ rangle} = {\ frac {\ mathrm {d} Q/Q} {\ mathrm {d} P/P}}}  ÂÂ$

The above formula usually produces a negative value, because the reverse nature of the relationship between the price and quantity demanded, as described by "law of demand". For example, if the price rises 5% and the quantity demanded decreases by 5%, then the elasticity on the price and the initial quantity = -5%/5% = -1. The only class of goods with PED greater than 0 is Veblen and Giffen. Although PEDs are negative for most goods and services, economists often refer to demand price elasticity as a positive value (ie, in absolute value).

This measure of elasticity is sometimes referred to as the elasticity of the demand for the price of a good, ie the elasticity of demand with regard to the price of the good itself, to distinguish it from the elasticity of the goods. demand for the good is due to the change in the price of other goods, ie complementary or substitute goods. The type of last size elasticity is called the cross elasticity of demand .

Because of the difference between two prices or inflated amounts, the PED accuracy given by the above formula decreases due to a combination of two reasons. First, PED for good is not always constant; as described below, PEDs may vary at various points along the demand curve, due to their percentage nature. Elasticity is not the same as the slope of the demand curve, which depends on the units used for both price and quantity. Second, percentage change is not symmetrical; instead, the percentage change between the two values ​​depends on which one is chosen as the initial value and which as the final value. For example, if the quantity requested increases from 10 units to 15 units, the percentage change is 50%, that is, (15 - 10) ÃÆ' Â · 10 (converted to percentage). But if the quantity demanded decreases from 10 units to 10 units, the percentage change is -33.3%, that is, (10-15) Ã,ÃÆ' Â · Ã, 15.

Two alternative elasticity steps avoid or minimize this deficiency from the basic elasticity formula: price-elasticity and bow elasticity .

Maps Price elasticity of demand

Price point elasticity

The point elasticity of the demand method is used to determine the demand change in the same demand curve, basically the number of very small demand changes measured through the elasticity point. One way to avoid the accuracy problem described above is to minimize the difference between the price and the initial and final quantity. This is the approach taken in the definition of price-point elasticity, which uses differential calculus to calculate the elasticity for very small changes in price and quantity at a given point on the demand curve:

$Â\; Â{\displaystyle Â\; Â\; Â\; Â\; Â\; Â\; Â}$           E                 Â                           =                        ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯      Â              Q                      Â         ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,          Â                         ÃÆ' -                                                           d        ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,        Â               Q                                  d        ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,       Â                                                     d        ÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂÂ,          Â Â

                                       < {\ displaystyle E_ {d} = {\ frac {P} {Q_ {d}}} \ times {\ frac {\ mathrm {d} Q_ { d}} {\ mathrm {d} P}}}  Â

Dengan kata lain, itu sama dengan nilai absolut dari turunan pertama kuantitas sehubungan dengan harga (dQ _d /dP) dikalikan dengan harga titik (P) dibagi dengan kuantitasnya (Q _d ). Namun, elastisitas harga-titik dapat dihitung hanya jika rumus untuk fungsi permintaan, ${\ displaystyle Q_ {d} = f (P)}  ÂÂ$ , dikenal sehingga turunannya berkenaan dengan harga, ${\ displaystyle {dQ_ {d}/dP}}  ÂÂ$ , dapat ditentukan.

This method of calculating price elasticity is also known as the "midpoint formula", since the average price and the mean quantity are the coordinates of the midpoint of a straight line between two given points. This formula is the midpoint method app. However, since this formula implicitly assumes the part of the demand curve between the points is linear, the greater the curvature of the actual demand curve over that range, the worse the estimate of its elasticity.

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History

Together with the concept of economic "elasticity" coefficient, Alfred Marshall is credited with defining PED ("demand elasticity") in his book Principles of Economics, published in 1890. He describes it as follows: "And we can say in general: - Elasticity (or response) of demand in a large or small market in accordance with the requested amount increases much or little for a certain price reduction, and decreases much or little for a certain price increase. He reasoned this because "the only universal law concerning one's desire for a commodity is that it diminishes... but this reduction may be slow or fast.If slow... a small price drop will lead to a relatively large ratio of increases in but if it's fast, a small price drop will lead to a very small increase in purchases.In the first case... the elasticity of his wishes, we might say, is great... case elasticity of demand is small. "Mathematically, Marshallian PED is based at a point-price definition, using differential calculus to calculate elasticity.

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Determinants

The main factor in determining PEDs is the willingness and ability of consumers after the price changes to delay direct consumption decisions about the good and looking for a replacement ("wait and see"). A number of factors can affect the elasticity of demand for a good:

Availability of substitute

The more substitutions available, the higher the elasticity, because people can easily switch from one item to another if small price changes occur; There is a strong substitution effect. If no close substitution is available, the substitution effect will be small and demand is not elastic.

Extent of definitions of good stuff

The wider the definition of the goods (or services), the lower the elasticity. For example, fish and chips of Company X tend to have relatively high demand elasticities if substantial amounts of substitution are available, whereas food in general will have very low demand elasticities because there is no substitute.

Percentage of revenue

The higher the percentage of consumer income represented by the price of the product, the higher the elasticity, because people will pay more attention when buying goods because they are expensive; The income effect is quite large. When goods represent only a negligible part of the budget, the earnings effect will be insignificant and demand is not elastic,

Needs

The more important it takes, the lower its elasticity, because people will try to buy it no matter the price, like the case of insulin for those who need it.

Duration

For most items, the longer the price changes, the higher the elasticity, as more consumers know they have the time and the will to find a replacement. When fuel prices rise suddenly, for example, consumers may still fill their empty tanks in the short term, but when prices stay high for several years, more consumers will reduce their demand for fuel by switching to carpooling or public transportation, in vehicles with larger fuel economy or take other steps. This however does not apply to consumer goods such as the car itself; finally, it may be necessary for consumers to replace their current car, so one would expect the demand to be less elastic.

Brand allegiance

Attachment to a particular brand - outside tradition or due to ownership restrictions - can override the sensitivity to price changes, resulting in a more inelastic demand.

Who pays

Where buyers do not directly pay for goods they consume, such as with corporate expense accounts, demand tends to become less elastic.

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Relationship to marginal revenue

The following equation applies:

${\ displaystyle R '= P \, \ left (1 {\ dfrac {1} {E_ {d}}} \ right)} Â Â$

On the chart with both the demand curve and the marginal revenue curve, demand will be elastic at all the quantities at which marginal revenue is positive. Demand is an elastic unit of quantity in which marginal revenue is zero. Demand is inelastic at any quantity at which marginal revenue is negative.

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Effect on total revenue

Perusahaan yang mempertimbangkan perubahan harga harus tahu apa dampak perubahan makes terhadap total pendapatan. Pendapatan hanyalah produk cute cute waktu unit:

${\ displaystyle {\ mbox {Pendapatan}} = PQ_ {d}} Â Â$

Generally any price change will have two effects:

Price effect

For non-elastic goods, unit price increases will tend to increase revenues, while price reductions will tend to decrease revenues. (The effect is reversed for elastic goods.)

Quantity effect

Unit price increases will tend to lead to fewer units sold, while a drop in unit prices will likely lead to more units sold.

For non-elastic goods, because of the inverse nature of the relationship between price and quantity demanded (ie, the law of demand), two effects affect the total income in the opposite direction. But in determining whether to raise or lower prices, companies need to know what the net effect is. Elasticity gives the answer: The percentage change in total revenue is approximately equal to the percentage change in the amount requested plus the percentage change in price. (One change will be positive, the other negative.) Percentage change in quantity is related to the percentage of price change based on elasticity: then the percentage change in earnings can be calculated by knowing the elasticity and the percentage of price change only.

As a result, the relationship between PED and total revenue can be explained for each item:

• When the price elasticity of demand for goods is perfectly inelastic (E _d = 0), the price change does not affect the quantity demanded for the good; raising prices will always lead to increased total revenue. Goods needed for survival can be classified here; a rational person would be willing to pay anything for good if the alternative is death. For example, someone in the desert who is weak and dying of thirst will easily give all the money in his wallet, no matter how much, for a bottle of water if he dies. The request does not depend on the price.
• When the price elasticity of the demand for goods is relatively inelastic (-1 & lt; E _d & lt; 0), the percentage change in the requested amount is less than that price. Therefore, when prices are raised, total income increases, and vice versa.
• When the price elasticity of the demand for goods is the elastic unit (or entity) (E _d = -1), the percentage change in the quantity demanded equals that of the price, the price will not affect the total revenue.
• When the price elasticity of the demand for goods is relatively elastic (-> E _d & lt; -1), the percentage change in the requested amount is greater than price. Therefore, when prices are raised, total revenue goes down, and vice versa.
• When the price elasticity of demand for goods is perfectly elastic (E _d is - ? ), any price increase, no matter how small, will cause the quantity requesting the goods to fall to zero. Therefore, when the price is raised, total income becomes zero. This situation is typical of goods whose value is determined by law (such as fiat currency); if the five-dollar bill sells for more than five dollars, nobody wants to buy it, so it's a zero demand.

Therefore, as the accompanying diagram shows, total revenue is maximized on the combination of price and quantity demanded where the demand elasticity is unity.

It is important to realize that price demand elasticity is not always constant across all price ranges. The linear demand curve in the accompanying diagram illustrates that price changes also alter the elasticity: the price elasticity is different at each point on the curve.

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Effects on tax incidence

PED, in combination with supply price elasticity (PES), can be used to assess where the incident (or "burden") of the tax per unit falls or to predict where it will fall if the tax is levied. For example, when demand is perfectly inelastic , by definition, consumers have no alternative to buy goods or services if prices increase, so the quantity demanded remains constant. Therefore, suppliers can raise prices by the full amount of taxes, and consumers will pay the whole. In the opposite case, when demand is perfectly elastic, by definition, the consumer has an unlimited ability to switch to an alternative if the price increases, so that they will stop purchasing the goods or services in question completely - the quantity demanded will fall to zero. As a result, companies can not pass on any part of the tax by raising the price, so they will be forced to pay for everything themselves.

In practice, demand tends to be relatively elastic or relatively inelastic, ie, somewhere between extreme cases of perfect elasticity or inelasticity. More generally, then, higher the elasticity of demand compared to PES, the more weight the producer burden; on the contrary, the more inelastic demand compared to PES, the more weighing the consumer. The general principle is that parties (ie, consumers or producers) who have fewer opportunities to avoid taxes by switching to an alternative will bear a greater proportion of the tax burden. In the end all tax burdens are brought by households because they are the main owners of the means of production that companies use (see Circular income stream).

PED and PES can also have an effect on the deadweight loss associated with the tax regime. When PED, PES or both are not elastic, the deadweight loss is lower than the scenario is proportional to the higher elasticity.

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Optimal pricing

Among the most common applications of price elasticity are determining prices that maximize revenue or profit.

Constant elasticity and optimal price

If a point of elasticity is used to model changes in demand over a limited range of prices, elasticity is implicitly assumed to be constant with respect to prices over a limited range of prices. The equation that defines price elasticity for a product can be rewritten (eliminating the secondary variable) as a linear equation.

${\ displaystyle LQ = K E \ times LP}$

dimana

${\ displaystyle LQ = \ ln (Q), LP = \ ln (P), E} Â Â$ adalah elastisitas, dan ${\ displaystyle K} Â$ adalah constant.

Demikian pula, persamaan untuk elastisitas silang untuk ${\ displaystyle n}  ÂÂ$ produk dapat ditulis sebagai satu set ${\ displaystyle n}  ÂÂ$ persamaan linear secara bersamaan.

${\ displaystyle LQ_ {l} = K_ {l} E_ {l, k} \ kali LP ^ {k}}  ÂÂ$

dimana

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This form of equation shows that point elasticity is assumed to be constant over the price range can not determine what price generates the maximum value ${\ displaystyle \ ln (Q)}$ ; just as they can not predict the price that produces the maximum ${\ displaystyle Q}$ or maximum revenue.

Constant elasticity can predict the optimal price simply by calculating the elasticity of the point at some point, to determine the price at which point the elasticity equals -1 (or, for some products, the set of prices at which the point elasticity matrix is ​​the negative identity matrix).

Elasticity is not constant and optimal price

Jika definisi elastisitas harga diperluas untuk menghasilkan hubungan kuadratik antara satuan permintaan ( ${\ displaystyle Q}  ÂÂ$ ) dan harga, maka dimungkinkan untuk menghitung harga yang memaksimalkan ${\ displaystyle \ ln (Q)}  ÂÂ$ , ${\ displaystyle Q}  ÂÂ$ , dan pendapatan. Persamaan mendasar untuk satu produk menjadi

${\ displaystyle LQ = K E_ {1} \ kali LP E_ {2} \ kali LP ^ {2}}  ÂÂ$

They give persuasion to Yang sesuai untuk beberapa produk menjadi

${\ displaystyle LQ_ {l} = K_ {l} E1_ {l, k} \ kali LP ^ {k} E2_ {l, k} \ kali ( LP ^ {k}) ^ {2}} Â Â$

Excel models are available that calculate constant elasticity, and use non-constant elasticity to estimate prices that optimize revenue or profit for a single product or multiple products.

The limit of pricing strategies maximizes revenue and maximizes profit

In most situations, the price that maximizes revenue is not a profit-maximizing price. For example, if the variable cost per unit is not zero (which is almost always there), then a more complex calculation of a similar type produces a price that produces optimal returns.

In some situations, a profit-maximizing price is not an optimal strategy. For example, where a large economical scale (as usual), capturing market share may be the key to long-term dominance of the market, so maximizing revenue or profit may not be the optimal strategy.

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price elasticity selected

Various research methods are used to calculate the real-life price elasticity, including historical sales data analysis, both public and private, and the use of the current survey of customer preferences to build test markets capable of modeling those changes. Alternatively, joint analysis (user preference ratings which can then be statistically analyzed) can be used. Estimates of price elasticity estimates can be calculated from the elasticity of demand revenues, under conditions of preference independence. This approach has been empirically validated using a bundle of goods (eg food, health care, education, recreation, etc.).

Although PED for most demand schedules varies depending on price, they can be modeled with the assumption of constant elasticity. Using this method, PEDs for various goods - intended to act as examples of the theories described above - are as follows. For suggestions as to why these goods and services might show PED, see the section above on the determinants of price elasticity.

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See also

• Bow elasticity
• Cross elasticity of the request
• Elasticity of revenue from request
• Supply price elasticity
• Supply and demand

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Note

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References

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External links

• Lessons on Elasticity in Four Parts, Youtube, Jodi Beggs
• Elasticity Pricing Model and Optimization
• Price elasticity of request: Practical Application
• Around. PED Products (U.S.)
• Around. PED of Various Foods Eaten at Home (United Kingdom)

Source of the article : Wikipedia