Law of Demand and Elasticity of Demand

In economic terms, demand may be defined as a consumer’s willingness and capacity to buy or consume a specific item or product. Furthermore, demand determinants go a long way toward explaining the desire for a particular commodity. A rise in the price of an item may decline the demand, and reducing an item’s cost or selling price will always raise the demand.

Law of Demand

As per the law of demand, it is commonly computed as the percentage change in the quantity asked over the percentage change in price, resulting in a negative elasticity. Price elasticity demand is the most used parameter to assess many things in a business and the organisation. The demand rule asserts that an increase in price lowers the desired amount, so unless the commodity is a Giffen good, demand curves are downward sloping. The negative of the quotient is usually dropped.

Elasticity of Demand

The elasticity of demand measures how much an individual’s demand for a good or service changes when the price of the good or service changes. 

Income and cross elasticity measure how responsive one variable is to a change in the other variable. It is used in economics to study the relationship between wages and productivity. In simple terms, cross elasticity measures how much change in one variable (wages) is associated with a change in another (productivity). 

There are two kinds of cross elasticity of demand: positive and negative. 

Positive cross elasticity indicates that as wages increase, productivity also increases; conversely, negative cross elasticity indicates that as wages decrease, productivity also decreases. The higher the cross elasticity of demand, the more responsive wages are to changes in productivity. 

Types of Demand Elasticity

In economics, demand elasticity measures how much one type of demand (such as quantity demanded or price demanded) changes with a change in another type of demand (such as income or expenditure). It is defined as the rate of change in demand or the asking price with a 1% change in the level of income or expenditure.

1. Income elasticity of demand: The higher the income level, the higher the level of demand for a good or service.
2. Expenditure elasticity of demand: The higher the level of expenditure, the higher the level of demand for a good or service.
3. Cross-sectional elasticity of demand: The demand for a good or service changes across different population segments. For example, the demand for cars may be higher in wealthy households than in low-income households.

Factors that Influence price elasticity of demand

1. The portion of capital spent on the goods:

When a person spends a tiny percentage of their available money on an item, their price elasticity demand is low. As a result, a shift in the price of an item has relatively little influence on the consumer’s willingness to buy it. When a good accounts for a significant portion of a customer’s income, the consumer is considered to have a more elastic demand. 

1. Nearest alternates are obtainable:

The price elasticity of demand is deemed elastic if customers may swap the product for other readily accessible goods that they see as equivalent. When customers cannot substitute an item, the demand for that good becomes inelastic.

1. Whether the entity is an essential or a luxury:

If the product is something the customer requires, such as Insulin, the price elasticity of demand is lower. If it’s a luxury item, the price elasticity demand is usually more considerable.

1. The quantity of time that has expired since a price adjustment:

Consumers are more elastic over more prolonged periods since they will discover acceptable and less expensive replacements after a price rise of an item.

Conclusion

Elasticity is a generic measure of an economic variable’s responsiveness to changes in another economic variable. Price elasticity demand, income elasticity of demand, and cross-price elasticity of demand are the three basic types of elasticity. The four elements that influence price elasticity of demand are the availability of substitutes, whether the commodity is a luxury or a necessity, the percentage of money spent on the good, and the amount of time since the price changed. A good is expected if the income elasticity is positive. The good has defected if the income elasticity is negative.