Classification of demand elasticity theory

Demand elasticity includes three types: demand price elasticity, income elasticity of demand and demand cross elasticity.

1. Price elasticity of demand. An index to measure the response degree of a commodity's demand to its own price change, calculated by dividing the percentage of demand change by the percentage of price change.

(1) defines the percentage of demand change caused by each price change 1%. It is usually expressed as the percentage of demand change caused by the percentage of price change. The ratio of these two percentages is called the elastic coefficient, and it is recorded as Ep.

(2) the nature of environmental protection

The value of [1] Ep will not change with the selected measurement unit.

[2] The value of EP can be positive, negative, equal to 0 or equal to 1. It depends on whether the two variables change in the same direction or in the opposite direction. Whether Ep is positive or negative only indicates the direction of the change of related variables, and the absolute value of Ep indicates the degree of change. Sometimes, in order to compare elastic values, a negative sign is added to the right end of the equation to make it a positive value. Generally, absolute value is used to express the influence degree of price change on demand change. We say that the demand price elasticity of a product is large, that is to say, its absolute value is large.

[3] The value of EP varies from commodity to commodity. Even on a given demand curve of the same commodity, it changes with the price.

(3) the changing range of 3)Ep

[1] Ep= 1 (unit demand price elasticity). It shows that the change range of demand is consistent with the change range of price. That is, for every price increase 1%,

The demand is correspondingly reduced 1%. On the contrary, the opposite is true. Characteristics of demand curve: equilateral hyperbola or hyperbola. Demand equation: PQ=K (constant).

[2] 1 & lt； Ep < ∧ (flexible demand). It shows that the change range of demand is greater than that of price (Δ p/p

[3]0 & lt； Ep< 1 (inelastic demand). It shows that the change range of demand is less than that of price (δ P/P&G T; Δ q/q). That is, for every price change of 1%, the percentage of demand change will be less than 1%. Characteristics of demand curve: steep (large slope).

[4] Ep→0 (demand is completely inelastic). In this case, it means δQ/Q = 0. In this case, the demand situation has the following characteristics: the demand does not change with the price change. The form of demand function is: Q=K (any given constant). On the two-dimensional space map, the demand curve is a straight line perpendicular to the abscissa, and the intercept on the abscissa is equal to K(=Q0). This means that no matter how the price changes, demand is always fixed. That is, regardless of the value of δ p, the value of δ q is always zero. This situation is rare.

[5]Ep→∞ (demand is completely elastic), at this time, δ P/P→ 0. In this case, the demand situation has the following characteristics: at a given price, the demand can be changed at will. The form of demand function is: P=K (constant). The demand curve will be a straight line parallel to the abscissa, and the distance from the abscissa is set to a constant K(=P0). This situation is also rare. In real life, some homogeneous products in the free market have the same price as a result of competition, which basically belongs to this demand curve.

(4) Policy implications of price elasticity of demand.

To sum up, if the demand is flexible, the manufacturer's income will decline after the price increase, because the speed of demand decline is greater than the speed of price increase; If the demand is inelastic, then the price increase can increase the income of the manufacturer, because the speed of demand decline is less than the speed of price increase; If the elasticity is exactly 1, the manufacturer's income remains unchanged, because the loss of falling demand just offsets the gain of rising prices. Therefore, manufacturers must consider the demand elasticity of related commodities when setting prices.

If EP

(5) Factors affecting the price elasticity of demand

[1] Is a commodity a necessity or a luxury? Necessities are less elastic, while luxury goods are more elastic.

[2] The more replaceable items, the closer the nature, and the greater the flexibility, and vice versa. For example, wool fabrics can be replaced by cotton fabrics, silk fabrics and chemical fiber fabrics.

[3] The expenditure on purchasing goods accounts for a large proportion of people's income, which is very flexible; When the specific gravity is small, the elasticity is small.

[4] the universality of commodity use. The more widely a commodity is used, the greater its demand elasticity, and vice versa.

[5] Time factor. The same commodity has high long-term elasticity and low short-term elasticity. Because the longer it takes, the easier it is for consumers to find substitutes or adjust their consumption habits.

(6) Application example of price elasticity

[1] is used to analyze and estimate the price and sales volume.

Example 1. In order to encourage the development of domestic oil industry, a country adopted measures to restrict oil imports in 1973. It is estimated that these measures will reduce the available oil by 20%. If the price elasticity of oil demand is between 0.8- 1.4, what is the expected increase of oil price in this country from 1973?

Solution: ∫ demand price elasticity = demand change percentage/price change percentage.

∴ Price change% = demand change%/price elasticity of demand %=20%/0.8=25% When price elasticity is 0.8, price change% = 20%/ 14.3% When price elasticity is10.4.

Therefore, it is estimated that the oil price in this country will increase between 1973 and 14.3-25%.

Example 2: The price elasticity of a product of an enterprise is between 1.5-2.0. If the price is reduced by 10% next year, how much is the expected increase in sales?

Solution: demand change% = price change %× price elasticity, such as price elasticity is 1.5, demand change% =1×1.5 =15, such as price elasticity is 2.0, demand change% =/kloc-0.

[2] Used for decision analysis. Price elasticity is very useful for some economic decisions. For example, how to price export materials? If the purpose of export is to increase foreign exchange income, then lower prices should be set for materials with high price elasticity, while higher prices should be set for materials with low elasticity. For another example, in order to increase the income of producers, people often raise the prices of agricultural products and lower the prices of high-end consumer goods such as televisions, washing machines and watches, precisely because the former is less flexible and the latter is more flexible.

[3] Used to analyze the economic phenomenon of "cheap grain hurts farmers". Case: Some people say that bad weather is not good for farmers, because poor harvest will reduce farmers' income. However, some people say that the bad weather is good for farmers, because after the agricultural harvest fails, food prices will rise and farmers will increase their income. Try to use economic theory to evaluate these two statements.

Analysis: Evaluating whether bad weather is beneficial to farmers mainly depends on how farmers' agricultural income changes under bad weather. The direct impact of bad weather on farmers is crop failure, that is, the supply of agricultural products is reduced, which shows that the supply curve of agricultural products moves to the upper left. If the market demand for agricultural products does not change at this time, that is, the demand curve does not change, then the reduction of agricultural product supply will lead to the increase of equilibrium price.

Generally speaking, people's demand for agricultural products is inelastic. According to the relationship between the price elasticity of demand and the increase of total sales income, farmers' agricultural income will increase with the increase of equilibrium price. Therefore, under the condition that the demand situation does not change due to bad weather and the demand for agricultural products is inelastic, the poor agricultural harvest caused by bad weather is conducive to increasing farmers' income.

Of course, if the demand situation changes at the same time, or the demand is not inelastic, then farmers will not get more income because of the bad climate. As can be seen from the above analysis, the answer to this question should first make assumptions about the demand elasticity and demand situation of agricultural products, rather than making general judgments.

2. Income elasticity. An indicator to measure the response of the demand of a commodity to the change of consumer income, divided by the percentage change of demand. (income elasticity of demand, abbreviated as EI)

(1) defines the percentage of demand change caused by income change 1%.

(2) Calculation method of income elasticity

Calculation of income elasticity at [1]

[2] Calculation of income elasticity of ARC

(3) the scope of income elasticity

1 ' EI & lt； 0 goods are called low-grade goods. It shows that the demand for a commodity decreases after the income increases. That is, q and I change in opposite directions. /kloc-In the 9th century, German statistician Engel found that under normal circumstances, when people's income increases, the proportion of spending on necessities will decrease, while the proportion of spending on luxury goods will increase.

Commodities with 2' 0 & ltEI & lt 1 are called normal commodities.

Goods with 3' EI> 1 are called high-grade goods. The above two situations (2) and (3) show that the demand for a commodity increases after the income increases, that is, I and Q change in the same direction. This is true of most commodities. Generally speaking, the income elasticity of daily necessities is small, while the income elasticity of high-end consumer goods is large.

(4) Policy implications of income elasticity.

[1] if ei

For example, the EI of a product is 0.25, which means that for every increase in consumers' income 1%, their demand for this product will only increase by 0.25%. In this case, this product cannot maintain its relative importance in the national economy. Because the growth of demand is less than the growth of national income, the production department of this product will not be able to share the growth of national income in proportion, and its development speed will be slower.

[2] If EI> 1, the production department of this product will gain a disproportionate share in the growth of national income. In other words, the development speed of this product is faster than the growth speed of national income.

For example, the income elasticity ei of a product is 2.5, which means that the growth rate of demand is 2.5 times that of income, that is, for every income increase of 1%, the demand will increase by 2.5%. Therefore, when EI> 1, the production department of this product will gain a disproportionate share in the growth of national income and develop faster.

(5) the application of income elasticity

Used to analyze and estimate sales. In order to solve the housing problem of residents, the government should make a long-term housing plan. Suppose that according to the research data, it is known that the income elasticity of rental demand is between 0.8- 1.0, and that of housing demand is between 0.7- 1.0. It is estimated that the per capita annual income will increase by 2-3% in the next decade. How much will housing demand increase in ten years? Solution: First estimate how much the average income of residents will increase after ten years.

If the annual increase is 2%, it will increase to (1.02)10 =12 1.8% after ten years, that is, the per capita income will increase by 21.8% after ten years. If it increases by 3% every year, it will increase to (1.03) ten years later. According to the formula: income elasticity = demand change%/income change%, so demand change% = income elasticity × income change%.

3. Cross elasticity. An index to measure the degree of response of the demand of one commodity to the price change of another commodity is calculated by dividing the demand percentage of the first commodity by the price change percentage of the second commodity.