Concepts of Supply and Demand Explained

3.0 Types of Elasticity

Price Elasticity of Demand (PED)

The price elasticity of demand is shows the relationship between the quantity demand and price, also provide a accurate calculate of the effect of a change in price on quantity demand. The definition of price elasticity of demand is a measurement responsiveness of the quantity demand of a good to a change in price of that good. Then, the price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. This equation can use to do a calculation about the effect of price changes on quantity demand and on the revenue that received by the company or firm before and after any price change. After that, the value of price elasticity can classify in five types. For example, elastic, inelastic, unit elastic, perfectly inelastic and perfect elastic.

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The level of response of quantity demand to a change in price can be varying considerably. In case, the quantity demanded price elasticity of demand changes proportionately, the value of price elasticity of demand is greater than 1, which call elastic. That means the percent that change in quantity of good is greater that the percent change of that goods price such as petrol. In contrast, when the quantity demand of PED is less than 1, which call inelastic, that means the the quantity demand is move proportionately less that the price of good such as food. Furthermore, the unit elastic which is means the value of PED is equal to 1, the quantity of demand is move the same amount as the price of good such as insurance package. Apart from that, when the quantity demand of PED is equal to 0 which call perfectly inelastic, the price of good and the quantity demand is remain same such as coffin. On the other hand, when the quantity demand of PED is equal to infinity which is call perfectly elastic that means has a small change in the price of good that lead to huge change in the quantity demand such as housing.

Graph of Price Elasticity of Demand

Cross Price Elasticity of Demand (XED)

Cross price elasticity of demand is show the relationship between two services or goods. Cross price elasticity of demand can defined as a measurement responsiveness of the quantity demand of one good to change in the price of another good. In additional, the cross price elasticity of demand can calculate as the percentage change in quality of good1divided by the percentage change in price of good2. Then, cross price elasticity of demand may be negative or positive value, depend on whether the goods are substitutes or complements.

While, if the good A is substitute for good B, when the price of good A increase, thus the coefficient value is positive. For example, if the price of coffee increases, the consumer may purchase more tea and less coffee. In opposite, when the price of another good is decrease, the demand of substitute goods will fall. In contrast, if the good C is a complimentary good for good D, demand for good C decline when the price of good D increases. For example, when the quantity demand of car is increase, the quantity demand of fuel also will increase. If the price of complement falls, the quantity demand of other good rise. So, the complement goods in cross price elasticity of demand will be negative. In summary, when the degree of elasticity for good XY is negative, the types of goods is complimentary; when the degree of elasticity for good XY is positive, the types of goods is substitute goods; when the degree of elasticity for good XY is equal to zero, , the types of goods is no related goods.

Income Elasticity of Demand (YED)

Income elasticity of demand can defined as a measure the responsiveness of quantity demand for a good to a change in the consumer income. By the same token, the income elasticity of demand can calculate as the percentage change in quantity demand divide by the percentage change in income. As a matter of fact, the income elasticity can used to predict the potential of market. Income is one of the determinants of consumer demand. Income elasticity is show the change in income is leading the change in demand. YED can use to classify the goods such as luxury goods, normal goods, necessity goods or inferior goods.

In additional, when a high value of income elasticity for one good, the producer of good can predict increase in sales and decrease when the elasticity coefficient fall. Under those circumstances, if the result of income elasticity coefficient is more than 0, it is reflect the fact that the quantity demand is move more proportionately as much as the income, and reveals it is a luxury good. Luxury goods are the product that are highly desire and associate with wealthy people who bought for some reasons such as to support their status. For example, Gucci which are sell Italian clothing and leather goods. On the other hand, if the result of income elasticity is less than 0, it shows it is an inferior good. The demand for the inferior good is go down as income increase such as bus. This is because the people will ride bus when their income is low, when their income is increase they will start to buy the car and stop to ride the bus. The decline of bus is when the income of people increase.

When the result of income elasticity is greater than 0 and less than 1, it is a normal good that is one where demand is directly proportional to income. Normal goods are items that when income increase and demand also will increase such as Adidas or Nike shoes. For example, Adidas tennis shoe is normal when you make more money you are likely to buy a shoes that have nice quality. Then, when the result of income elasticity is equal to 0, it is a necessity good, because the change of income did not affect the good. Necessity goods are the goods or service that are consider to be live in live, such as water, food, medical care and shelter. These goods were the goods that people will purchase for at least certain amount and no matter to the increasing of price of goods.

Price Elasticity of Supply (PES)

Price elasticity of supply is a measurement of the responsiveness in the quantity supplied to a change in price of that good. PES calculated as the percentage change in quantity supplied divided by the percentage change in price. The factors that can affect the elasticity of supply is the flexibility of seller to produce, time period, technology improvement, availability and mobility of factors of production and perishability. PES is necessary for a company to know how quickly and effectively to it can respond to change market condition, especially to the change of price.

The price elasticity of supply can classify five types of supply curve from the calculation of elasticity of supply. When the price of elasticity is greater than 1 which call elastic that means the quantity supply is move proportionately more than the price. In contrast, when the PES is less than 1that is inelastic, means the quantity supply is move proportionately less than the price. Then, when the PES is equal to 1 that is call unit elastic, means the quantity supply is move at the same amount as price. In additional, when the PES is equal to 0 which is call perfectly inelastic that means regardless of the price and the quantity supply remain the same. Furthermore, when the PES is equal to infinity that call as perfectly elastic is mean a huge change in quantity demand is lead by a small change in the price.

Graph Price Elasticity of Supply

4.0 Conclusion

In conclusion, although the concept of demand and supply are introduce to separate, it is the combination of these those forces that determine how much of a service or good is consume and produce in an economy and at what price. Elasticity is the term economists that use to describe how much supply or demand responds to changes in price. Elasticity can let the businesspeople know when they need to increase the price of their product that less of their product will be purchase but what they did not know is by how much.