29. Quantity of demand. Law of Demand The quantity of demand is the quantity of a good that buyers are ready (i.e., willing, able) to buy at a given price during a certain period: day, week, etc. The quantity of demand is inversely related to the price: the higher the price

19. Income Elasticity of Demand Tool “A man’s success is measured not by how high he climbs, but by how high he jumps when he hits the bottom,” said General George Patton, thereby emphasizing the elasticity that manifests itself in life,

51. Price Elasticity of Demand (Marshall) Instrument On the Malay Peninsula, when asked about the best time to harvest durian, a fruit “with a hellish smell but with a divine taste,” the answer is: “When its fruit falls from the branch, the men’s sarongs ride up.”

Cross elasticity of demand

Price elasticity of demand, which was discussed above, reflects the effect of changes in the price of a product on changes in the quantity demanded for it. However, demand may change due to other factors. One of them is the dynamics of prices for other goods.

The degree of change in the quantity demanded of one good caused by a change in the price of another good is called cross elasticity of demand. Cross elasticity of demand is measured by the coefficient of cross elasticity of demand (cappie), which is determined by the ratio of the percentage change in the quantity of demand for one product to the percentage change in the price of another product:

where% DLH is the percentage change in the quantity of demand for goods X% Shchu is the percentage change in the price of goods B.

To determine the coefficient of cross elasticity of demand, use the center point formula, as for the coefficient price elasticity demand, with the only difference that the numerator of the coefficient formula shows the percentage change in the quantity of demand for one product (X), and the denominator shows the percentage change in the price of another product (Y):

The value of the coefficient of cross elasticity of demand depends on how different goods are related in combination with each other. Possible ratios of two goods are shown in Chart 2-13.

If the cross elasticity of demand is O, goods X and Y are independent of each other: no matter how much the price of butter (good B) changes, the quantity demanded of photographic film (good X) is unlikely to change. This situation is depicted in graph 2-13 of straight line I, reflecting the dynamics of demand for photographic film caused by a change in the price of oil.

If goods X and Y are substitutes, then the demand for good X is directly dependent on the change in the price of good B. For example, if the price of motorcycles (good B) increases, we should expect an increase in the demand for bicycles (good X). The coefficient of cross-elasticity of demand for interchangeable goods is large 0 The dynamics of demand for interchangeable goods (bicycle) is depicted in graph 2-13 of curve II with a positive peak. The greater the positive coefficient of cross-elasticity of demand, the more interchangeable the two goods are.

For related goods, the dynamics of the friend's demand (for example, photographic film) are inversely related to the change in the price of the other product (for example, cameras). Therefore, the coefficient of cross-elasticity of demand for interconnected knitted goods is less than 0, that is, it has a negative value. In this case, the dynamics of demand for an interconnected product is shown in graph 2-13 of curve Ш, which has a Volume slope.

Knowledge of the coefficients of cross elasticity of demand is no less important for the implementation of successful entrepreneurial activity than the coefficient of price elasticity of demand.

Income Elasticity of Demand

Another factor (besides the price of a good and the prices of other goods) that influences the demand for a good is the consumer's income. The relationship between a change in demand for a product and a change in income (all other conditions being constant) is described by the income elasticity of demand. Elasticity of demand

by income is defined as the ratio of the percentage change in the quantity of demand for a product to the percentage change in income. The coefficient of income elasticity of demand (ICD) is determined by the formula:

where % APH is the percentage change in the quantity of demand for product X; % LD is the percentage change in consumer income.

To calculate this coefficient, use the center point formula, therefore:

where DgiDi is the final and initial income of the consumer.

At first glance, determining the relationship between income and demand and, accordingly, their changes is very simple: the higher the income, the greater the demand and vice versa. But in reality, there is no single universal pattern describing the behavior of income owners in any commodity markets. Both the shapes of demand curves, which reflect the dynamics of the quantity of demand depending on the amount of income, and the values ​​of the coefficients of elasticity of demand with respect to income depend on exactly what goods are purchased.

The most common, as is known, is the division of goods into “normal” goods and “lower category” goods. For normal goods, the income elasticity of demand is greater than 0, since as income increases, the demand for such goods increases. In addition, the value of the income elasticity of demand for normal goods

is different: for luxury goods it is large and, and for essential goods it is less than 1 (but more than 0). For goods of the lowest category, this coefficient is less than 0, since the demand for such goods decreases with an increase in income.

German statistician of the 19th century. E. Engsl was the first to study the connection between buyer income and the structure of consumer spending. He saw a certain pattern: the higher the quality of life of the population, the less part of the income the consumer spends on purchasing low-grade food products. This is the essence of Engel's first law.

So, in order to predict demand, an entrepreneur must calculate at least one price, a series of cross-section coefficients of demand elasticity and an indicator of income elasticity of demand.

The practical significance of these demand elasticity coefficients is difficult to overestimate. Thus, knowledge of a certain type of price elasticity of demand for a product allows the vata syndrome to change gross income manufacturer - he can increase his gross income by reducing the price of a product with elastic demand and increasing the price of a product with inelastic demand. Knowing the value of the income elasticity of demand coefficient allows us to predict the development and prosperity of the industry, or a reduction in production volumes and stagnation. Thus, a positive and high value of the income elasticity of demand coefficient indicates that an increase (decrease) in household incomes can cause a significant increase (decrease) in production volumes in the industry. A low value of the income elasticity of demand coefficient indicates the prospect of a reduction in production in the industry.

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Cross elasticity

Lesson - 17# - Cross Elasticity of Demand

Economics - Elasticity

Price elasticity of demand

Microeconomics. Lesson 12. Elasticity. Elasticity of demand

Subtitles

Until now, we have analyzed the elasticity of demand for only one product; we have studied how a change in the price of a product is reflected in a change in quantity. Now let's look at cross-products and talk about cross-elasticity of demand. Cross elasticity of demand. There are many different scenarios. But first of all, it is worth considering how a change in the price of one product affects the volume of demand for another. As an example, consider two airlines operating on the same route. Flights at the same time, for example between New York and London. Airline 1, Airline 2, high competition. The price here is $1000 for a round trip flight. The volume of demand is 200 tickets per week. The price of Airline 2 is $1000 for a round trip flight, the volume of demand is also 200 tickets. What happens if Airline 1 raises its price from $1,000 to $1,100? So, Airline 1 will raise the price from $1,000 to $1,100. We can even take a less significant increase, up to $1,050. Relatively small price increase. Remember, if we are talking about a relative price increase, then we are talking about elasticity. We shouldn't say that $50 over $1,000 is a 5% price increase. This is the standard withdrawal, yes This is an increase of 50 dollars over 1000, or 5%. But if we are talking about elasticity, we want to get the same relative change when changing from 1000 to 1050 and when changing from 1050 to 1000. We are using the midpoint as a base, so we will write the relative change in quotes in this scenario, since this is slightly different from traditional relative change calculations. We have a price change of 50. 50. We use 1025 as a base - the average between 1000 and 1050. It turns out a change... so, we get a change: 50 divided by 1025 is equal to 4.9%, taking into account rounding. We put the price increase in quotes because we used the average value. If this were a price change the other way around from 1050 to 1000, then there would be a decrease of 4.9 since we would use the same approach. Today everyone uses airline websites to price comparisons , if we are talking about the same direction. Departure from the same airport at the same time, arrival at the same airport. People will take this ticket since it only costs $1,000. Even if it's only $50, why pay it? Therefore, here the quantity demanded will be zero. And this quantity is 400. We do not consider the actual capacity of the aircraft and so on. We have a very simple model. What will be the relative change in quantity for Airline 2? The change in quantity will be 200, since we went from the number 200 to 400. We will use the average between 200 and 400 as a base, which is 300. This is approximately 67%. So, we got the cross elasticity of demand for tickets of Airline 2 relative to the price of Airline 1. So, the cross elasticity of demand for tickets of Airline 2 relative to the price of Airline 1. And we got a relative change in the volume of demand for tickets of Airline 2 - 67% to the relative change in the price of Airline 1, not Airlines 2. That's why it's called cross elasticity. We replace one product with another. This is approximately 5%. Let's do the calculations: 67% divided by 5% equals 13.4% rounded. So, 67% divided by 5% equals 13.4% rounded. This is a very high cross elasticity of demand. Even if the increase is only $5, the effect will be the same. And here there will be a very large number. This situation of cross elasticity of demand occurs, since these goods are almost perfect substitutes. People don't care what kind of product they buy. They just take the one that is cheaper. If there are practically perfect substitutes, as in this example, the cross elasticity of demand approaches infinity. Perfect substitutes mean the cross elasticity of demand approaches infinity. Towards infinity. She is getting higher and higher. Theoretically, if the goods are very similar, even if the price increases by 1 cent, people will say, “Why spend 1 cent? I'll use Airline 2." And this figure will be even lower. And this one can approach infinity. And this is good. If the price elasticity of demand is constant, the only way to increase the quantity of a standard good is to lower the price, and here we have increased the price of a competitive good, a substitute good, and increased the demand for Airline 2's product, which is very important. There is no inverse relationship here. This is a positive value. But the inverse relationship can occur when using cross elasticity of demand. This means that this was an example of substitutes. Let us now consider the example of complementary goods. Let's talk about e-books. Let's say I have an e-book. EBook. And the current demand quantity per week, let's say, will be 1000. The price of the e-reader that I need for my e-reader is $100, but let's say the price of the e-reader has decreased from $100 to $80. Price reduction by $20. What will happen to the e-book if we assume that its price does not change? Volume of demand for e-book will increase. Let's say the demand for an e-book increases by 100 because more people can afford it or have money left over to buy it. more e-books. We don't know what the price of this e-book is, but for a given price the quantity demanded will increase to 1100. Calculate the price elasticity of demand yourself. Obviously, you will get a negative value, as in the case of a constant price elasticity of demand. When calculating, remember that we need the relative change in the number of e-books to the relative change in the price of the e-reader. The relative change in the number of e-books to the relative change in the price of the e-reader. And one more thing to remember: don't take −20 to 100, take −20 to the average of the two when looking at elasticity. Of course, if you do the math yourself. So, doing the math here, we get −20/90. −20/90. And here it will be equal to +100 to the average of these two values, which is 1050. 1050. We get 100/1050, which gives us about 0.095. 0.095. The change in the quantity demanded for my book is −9.5%. And the denominator here is -20/90. We get a reduction of 22%. 22% - decrease. If you divide the numerator by the denominator, you get 0.0952/−0.22222..., or −0.43. It's clear. When the price of an e-book reader drops, this related product that comes with my e-reader increases demand. As in the example of price elasticity of demand, we obtain a negative value. Let's look at two completely unrelated products. Let's say I have basketballs. Basketballs. The price of basketballs changes from $20 to $30. What will happen to my e-book? It won't affect her in any way. The quantity demanded will remain 1000. In this example, the relative change in the quantity demanded for the e-book will be zero. If we wish to calculate the cross elasticity of demand to a relative change in basketballs, which will be 30/25, that is, 10/25, or an increase of 40%. That would be 0/40%, or just 0. So, a 40% increase would be 0/40%, or just 0. For unrelated products, a change in the price of one of which does not affect the quantity demanded of the other, the cross elasticity of demand would be equals 0. If we are talking about related products, the cross elasticity of demand will be negative. If we are talking about substitutes, it will be positive. The closer the substitutes are, the more positive the cross elasticity of demand will be.

Definition

Cross elasticity of demand- a measure of the percentage change in the quantity of a good purchased in response to a change in the price of another good. Cross elasticity coefficient E (\displaystyle E) calculated as:

Where D (\displaystyle D) is the elasticity of demand X Y (\displaystyle XY)- cross elasticity of demand for any two goods, Q (\displaystyle Q)- quantity of goods purchased, P (\displaystyle P)- the price of the product. That is, the formula for cross elasticity of demand shows the degree of change in demand for a product X (\displaystyle X) in response to a change in the price of another good Y (\displaystyle Y).

Values

positive E X Y D > 0 (\displaystyle E_(XY)^(D)>0) . Consumers can replace the consumption of a product X (\displaystyle X) for consumption of goods Y (\displaystyle Y). And the greater the interchangeability of two goods, the higher the value of the coefficient. For example, two brands of cars, two brands of drinks, etc.

negative E X Y D< 0 {\displaystyle E_{XY}^{D}<0} when both goods are complementary (complementary). Consumers in the short run cannot change their consumption of goods X (\displaystyle X) without a change in the same direction in the consumption of goods Y (\displaystyle Y). And the greater the complementarity of goods, the greater the modulus value of the coefficient will be. It can also be concluded that the goods X (\displaystyle X) And Y (\displaystyle Y)“go together” with each other.

Cross elasticity of demand coefficient null E X Y D = 0 (\displaystyle E_(XY)^(D)=0) when two goods unrelated. Consumption of one good does not depend on the price of another. For example, a computer and ice cream.

Factors

The factors that determine the coefficient of cross elasticity of demand are the natural properties of goods or services, their ability to substitute for each other in consumption.

Cross price elasticity of demand can be asymmetric: when the price of the first good decreases and the demand for another good increases, but if the price of the second good rises and the demand for the first good does not change.

Income effect

The coefficient of cross elasticity of demand can be used to characterize the interchangeability and complementarity of goods only for small price changes. When prices change significantly, the income effect manifests itself, leading to a change in demand for both goods. So, if the price of the first good decreases by half, then the consumption of not only the first good, but also other goods will increase. Thus, E X Y D< 0 {\displaystyle E_{XY}^{D}<0} , which means these goods or services must be regarded as complementary. To avoid this, when calculating cross elasticity, the influence of the income effect is excluded:

When cross elasticity of demand coefficient, excluding the income effect, is positive E X Y ∗ > 0 (\displaystyle E_(XY)^(*)>0) net substitutes(or Hicks interchangeable). Goods or services identified with E X Y D > 0 (\displaystyle E_(XY)^(D)>0) are called as gross substitutes .

When cross elasticity of demand coefficient, excluding the income effect, is negative E X Y ∗< 0 {\displaystyle E_{XY}^{*}<0} , then such goods or services are called net complementary. And goods or services defined by E X Y D< 0 {\displaystyle E_{XY}^{D}<0} , are called as gross-complementary .

In the event of a cross-effect, they say that product X is defined as a net substitute for product Y, and product Y is a net substitute for product X. Products X and Y are gross substitutes, but net complementary, since the result of a price change is negative, since the positive substitution effect is offset by the negative income effect. The property of substitutability is the dominant relationship in the system as a whole.

Demand for a product changes under the influence of price changes in the markets for substitute and complementary goods. Quantitatively, this dependence is characterized by the coefficient of cross price elasticity of demand, which shows how the quantity of demand for a given product will change when the price of another product changes. The formula for calculating the coefficient of cross elasticity of demand for product A depending on changes in the price of product B is as follows:

Calculating the coefficient of cross price elasticity of demand allows you to answer by how many percent the quantity of demand for product A will change if the price of product B changes by one percent. Calculating the cross-elasticity coefficient makes sense primarily for substitute and complementary goods, since for weakly interrelated goods the value of the coefficient will be close to zero.

Let's remember the example of the chocolate market. Let's say we also conducted observations of the halva market (a product that is a substitute for chocolate) and the coffee market (a product that is a complement to chocolate). Prices for halva and coffee changed, and as a result, the volume of demand for chocolate changed (assuming all other factors remain unchanged).

Applying formula (6.6), we calculate the values ​​of the coefficients of cross price elasticity of demand. For example, when the price of halva is reduced from 20 to 18 den. units demand for chocolate decreased from 40 to 35 units. The cross elasticity coefficient is:

Thus, with a decrease in the price of halva by 1%, the demand for chocolate in a given price range decreases by 1.27%, i.e. is elastic relative to the price of halva.

Similarly, we calculate the cross elasticity of demand for chocolate with respect to the price of coffee if all market parameters remain unchanged and the price of coffee decreases from 100 to 90 deniers. units:

Thus, when the price of coffee decreases by 1%, the quantity of demand for chocolate increases by 0.9%, i.e. The demand for chocolate is inelastic relative to the price of coffee. So, if the coefficient of elasticity of demand for good A with respect to the price of good B is positive, we are dealing with substitute goods, and when this coefficient is negative, goods A and B are complementary. Goods are called independent if an increase in the price of one good does not affect the amount of demand for another, i.e. when the cross elasticity coefficient is zero. These provisions are only valid for small price changes. If price changes are large, then the demand for both goods will change under the influence of the income effect. In this case, products may be incorrectly identified as complements.

Income Elasticity of Demand

The previous chapter examined the dependence of demand on consumer income. For normal goods, the higher the consumer's income, the higher the demand for the product. For lower category goods, on the contrary, the higher the income, the lower the demand. However, in both cases, the quantitative measure of the relationship between income and demand will be different. Demand may change faster, slower, or at the same rate as consumer income, or not at all for some goods. The income elasticity of demand coefficient, which shows the ratio of the relative change in the quantity of demand for a product and the relative change in consumer income, helps determine the measure of the relationship between consumer income and demand:

Accordingly, the coefficient of income elasticity of demand can be less than, greater than or equal to one in absolute value. Demand is income elastic if the quantity of demand changes to a greater extent than the quantity of income (E0/1 > 1). Demand is inelastic if the quantity demanded changes less than the quantity of income (E0/ [< 1). Если величина спроса никак не изменяется при изменении величины дохода, спрос является абсолютно неэластичным по доходу (. Ед // = 0). Спрос имеет единичную эластичность (Ео/1 =1), если величина спроса изменяется точно в такой же пропорции, что и доход. Спрос по доходу будет абсолютно эластичным (ЕО/Т - " со), если при малейшем изменении дохода величина спроса изменяется очень сильно.

In the previous chapter, the concept of the Engel curve was introduced as a graphical interpretation of the dependence of the quantity of demand on the consumer’s income. For normal goods the Engel curve has a positive slope, for goods of the lowest category it has a negative slope. The income elasticity of demand is a measure of the elasticity of the Engel curve.

The income elasticity of demand depends on the characteristics of the product. For normal goods, the coefficient of income elasticity of demand has a positive sign (Eо/1 > 0), for goods of the lowest category it has a negative sign (-Un //< 0), для товаров первой необходимости спрос по доходу неэластичен (ЕО/Т < 1), для предметов роскоши - эластичен (Е0/1 > 1).

Let's continue our hypothetical example with the chocolate market. Let's say we observed changes in the incomes of chocolate consumers and, accordingly, changes in the demand for chocolate (we will assume all other characteristics unchanged). The observation results are listed in Table 6.3.

Let us calculate the elasticity of demand for chocolate with respect to income on the segment where the amount of income grows from 50 to 100 deniers. units, and the quantity of demand - from 1 to 5 units. chocolate:

Thus, in this segment, the demand for chocolate is income elastic, i.e. When income changes by 1%, the quantity demanded for chocolate changes by 2%. However, as income increases, the elasticity of demand for chocolate decreases from 2 to 1.15. This has a logical explanation: at first, chocolate is relatively expensive for the consumer, and as income increases, the consumer significantly increases the volume of chocolate purchases. Gradually, the consumer becomes saturated (after all, he cannot eat more than 3-5 bars of chocolate per day; among other things, it is unsafe for health), and further growth in income no longer stimulates the same growth in demand for the product. If we continued our observations, we could see that at very high incomes, the demand for chocolate becomes income inelastic (Eo/1< 1), а потом и вовсе перестает реагировать на изменение дохода (Еп/1 - " 0). Вид кривой Энгеля для этого случая представлен на Рис.6.6.

Ш Let's consider the relationship between consumer income and their demand using the example of the Republic of Belarus. Table 6.4 shows data on the monetary income of households in the country in different years and information on the structure of household consumption. Since price indicators fluctuated significantly due to inflation and other factors, we are interested in percentage changes in real incomes of consumers and changes in the structure of consumption.

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7.6 Elasticity of demand. Introduction

Elasticity is the topic that causes the most difficulty for students. According to my students, this topic is complex due to the many cumbersome formulas, as well as the many special cases of application of certain formulas.

In fact, the idea of ​​elasticity is one of the simplest in economic analysis, and there is no need to memorize the formulas. Instead, understand the RULES behind certain formulas and practice applying those rules in different situations.

Let's start with a basic definition of elasticity. We use the word “elastic” when we want to emphasize that an object responds well to pressure on it. For example, an elastic bandage means that when force is applied, it quickly changes shape and stretches. And an inelastic eraser means that no matter how we stretch it, it will not change shape. Thus, elasticity can be defined as a measure of the response of one quantity to a change in another quantity. Therefore, the most important and basic formula for elasticity looks like this:

Thus, elasticity can be defined through the ratio of percentage changes in values. Why is this so? Because this is the most convenient way to determine the reaction of one quantity to a change in another. To calculate the measure of influence of one quantity on another, nothing better has been invented than simply dividing the changes in quantities by each other. Since quantities can be measured in different units (for example, A in pieces, and B in rubles), their changes are calculated as a percentage.

How can we measure the percentage change in A? We usually use a simple formula taken from a school mathematics course:

In order to find the percentage change in a quantity, we must divide the absolute change in the quantity by the original value of the quantity and multiply by 100%. This is the standard approach to finding the percentage change in a quantity, and it is to determine the percentage change in the quantity relative to the ORIGINAL POINT. In economic measurements, this approach is called the “point” approach.

In addition to the point approach to measuring percentage changes in the economy, there is an alternative approach, in which percentage changes are calculated not relative to the original point, but relative to the MIDDLE of the INTERVAL.

This approach to measuring percentage changes is called "arc".

Now we will see that elasticity, depending on the approach used, can also be point or arc.

We will consider the elasticity of demand by price and non-price factors. Let's start with the price elasticity of demand.

7.6.1 Price elasticity of demand. Basic formulas

Price Elasticity of Demand

Price elasticity of demand is equal to the ratio of the percentage change in quantity demanded to the percentage change in price.

Depending on the approach to calculating percentage changes, the elasticity of demand can be point or arc:

As we see, point and arc elasticity come from the same formula. This is what is worth remembering. Formulas for point and arc elasticity usually cause fear and horror among students. As we have seen, in fact there is nothing scary about these formulas - they are obtained from the general elasticity formula. We apply the rules for the point and arc approach to determining percentage changes, and obtain the formulas for the point and arc price elasticity of demand.

When to use point and when arc elasticity? To answer the question, remember that point elasticity considers percentage changes relative to the initial point, while arc elasticity is relative to the middle of the interval. Therefore, for small changes (usually less than 10%), you can get by with point elasticity, and for large changes (more than 10%), it is more correct to use arc elasticity. In principle, in any case, it is possible to calculate both point and arc elasticity; the only question is which approach will be more correct. You can remember that arc elasticity is the same as point elasticity, only calculated at the point in the middle of the change interval.

You may also have noticed that in the formulas presented above, the change ratio can be replaced by the derivative Q p ′. Generally speaking, the mathematical definition of a derivative implies a limit to this ratio. , but in economic measurements in some cases mathematical accuracy can be omitted.

When calculating elasticity should you use the incremental ratio and when should you use the derivative? It all depends on the task data. If we are given a smooth function whose derivative can be calculated, then we can use the derivative. If we are given a set of points without a function, then we need to use the increment relation.

In the same way, you can measure the elasticity of demand for any non-price factors. Typically, the income elasticity of millet and the price elasticity of a related product (cross elasticity of demand) are considered.