Introduction
Generally, consumers and sellers react differently in the market in response to a given change in the price of some products or services. In most cases, especially where the goods produced are elastic, when the prices of such commodities increase, customers counter the adjustment by lowering the quantity of the goods they consume. Similarly, if the cost decreases, buyers are likely to purchase a good volume of the product being offered. In other words, the consumption of the goods moves in the opposite direction from the prices. The products that portray such behavior are mainly consumer durables that customers can postpone their usage when the prices increase too high. For instance, assuming the cost of a car increases, the buyer may opt not to buy the product, thus reducing the number of items sold significantly. By understanding the concept of price elasticity of demand, such as various types and critical factors affecting it, customers and producers will be capable of determining how to respond to the potential changes in the market following price fluctuations.
The concept of price elasticity of demand is the reaction of the quantity demanded of a given commodity to the change in the price of the same good. It is calculated in terms of the percentage change of the amount needed and then divided by the respective adjustment in price. The demand curve elaborates the relation between the price and the product units demanded (Wakashiro, 2019). Assuming that when the price of a car was about $20,000, the number of vehicles required became 150 and following a sudden increase in their prices to $25,000, the unit quantity needed reduced to 100 (Jankhotkaew et al., 2021). To evaluate price elasticity, it is necessary to establish percentage change in quantity and price.
For instance, the percentage change in quantity demanded (Qd) = Qd2 – Qd1 where Qd2 is 150 and Qd1 is 100 cars.
Percentage change in Qd = (100 – 150) / 100 * 100 = 50%
The percentage change in prices (P) = P2- P1 whereby P2 is $25,000 and P1 is $20,000.
Percentage in P = ($20,000 – $25,000) / $20,000 * 100 = -25%. Therefore, the price elasticity of demand = 50% / -25% = -2 which becomes 2.
Based on the above calculation, the price elasticity of demand for the car is 2 showing that it is elastic. In other words, the change in price from $20,000 to $25,000 prompted the consumers to reduce the Qd from 150 units of product to 100 (Zhu et al., 2018). Generally, the price elasticity of demand is negative because prices and Qd move in opposite directions when plotted in the demand curve. When calculating the measure of change, the negative is ignored, and the result is treated as a positive figure.
The calculated price elasticity of demand for cars implies that if the price changes by approximately 1%, the number of units of vehicles demanded will change by 2%, respectively. In other words, the price difference will impact the demand for cars in the market (Skolthanarat, Somsiri, and Tungpimolrut, 2019). For instance, a 10% increase in the price of an automobile will result in a 20% decrease in the Qd in the industry. On the other hand, assuming the price drops by 10%, the demand for cars will increase massively by 20%. The changes are essential in influencing the behavior of sellers and buyers of vehicles in the industry.
Types of Price Elasticity of Demand
The change in Qd against the prices varies significantly depending on the nature of products offered in the market. For instance, commodities may indicate massive adjustments in Qd following price changes. This approach results in different types of price elasticity of demand, including unitary elastic demand, perfectly elastic, relatively elastic, perfectly inelastic, and relatively inelastic demand (Beck and Lein, 2020). Based on the categories named above, the price elasticity of demand becomes greater than one. Other goods show slight variation, with value less than one, while some portray no change in Qd irrespective of the alteration in market charges.
Unitary Elastic Demand
When the fall in prices yields an equivalent decrease in the Qd of products, it is called the unitary elastic demand. The change may increase or decrease, but it results in the same outcome. In other words, the percentage change in Qd divided by the percentage in price gives a value of 1. Figure 1 below in the appendices depicts a unitary elastic demand whereby the demand curve is uniform. If the prices increase from OP to OP1, the Qd will drop from OQ1 to OQ. Similarly, a fall in price from P2 to P1 will result in an adjustment in the number of units from Q2 to Q1, respectively (Ebrahimi, Kianfar, and Bijari, 2021). Examples of goods that exhibit the unitary elastic demand are mobile phones and home appliances.
Perfectly Elastic Demand
In most cases, a slight change in the price of a product may produce a significant variation in the number of units demanded by consumers in the market. For instance, if the price of a commodity rises, the Qd drops massively, and when the costs decrease, the Qd increases (Huang and Kockelman, 2020). When the price of the given commodity increases, the overall demand for the item may reduce to zero. Therefore, the value of perfectly elastic demand is given to be infinity. According to figure 2 in the appendices, the shape and slope of perfectly elastic demand determine the degree of its elasticity (Lederer, 2020). It is most common in an industry where there are many sellers of the same product leaving the consumer with numerous choices to buy from.
Relatively Elastic Demand
When a change in prices produces a significant variation in the Qd greater than that of cost, it is called the relatively elastic demand. For instance, assuming the price increases or decreases by 1%, then the Qd decreases or rises by 2% to reflect the change where the demand is greater than the price alteration (Sinha, Modak, and Sana, 2020). In the given case, the elasticity of the demand becomes greater than 1. Based on figure 3 in the appendices, the price movement from P to P1 is smaller in relation to the adjustment in quantity from Q to Q1 (Jiang et al., 2021). Most of the products in this category are luxury, such as designer shoe brands.
Perfectly Inelastic Demand
In some cases, any change in price that is either an increase or decrease does not result in the number of units demanded by the consumers. In other words, the Qd remains unchanged irrespective of the price movement in the market on the given product (Masike and Vermeulen, 2022). The elasticity demand of such commodities is given as zero (Bekkerman, Brester, and Tonsor, 2018). The respective curve of the perfectly inelastic demand forms a straight vertical line. Figure 4 in the appendices depicts the features of this type of price elasticity of demands, whereby if the price moves from P1 to P2 or P2 to P1, the number of demanded units will be Q1.
Relatively Inelastic Demand
In a relatively inelastic demand, the change in the quantity of a commodity demanded by consumers is less than the respective adjustment in the price of the given item. When price falls or rises, the proportionate disparity is higher than the variation in demand (Rodrigues, Losekann, and Silveira Filho, 2018). The elasticity demand value is less than 1, and it has a rapidly sloping curve. According to figure 5 in the appendices, the price movement from P1 to P yields a slight change in the quantity of the product demanded from Q1 to Q (Pacudan and Hamdan, 2019). Comparing the alterations, the difference in P1P is greater than the adjustment in Q1Q. Some of the commodities that show this kind of elasticity include petroleum, salts, and medical care.
Factors Affecting Price Elasticity of Demand
Generally, several factors play a significant role in influencing the price elasticity of demand. They include the availability of substitute products whereby a customer can access the products that offer the same level of satisfaction; they will opt for the choices making the price of the good elastic. However, when there is no available substitute, the commodity will fall under inelastic demand (Ranjan and Jha, 2019). Similarly, luxury or necessity impacts price elasticity. For instance, products that are basic have lower elasticity compared to luxury commodities whose usage can be postponed.
Conclusion
The price elasticity of demand influences the behavior of buyers and sellers in the commodity market. Various products such as fuels, cars, and salts have different elastic demands. These result in varied types of price elasticity of demands, such as perfectly elastic demand, unitary, relatively elastic, and inelastic demands. Each of the named categories portrays unique features following the variation in percentage change in price and Qd. In addition, other factors including the necessity or luxury of the good and existence of a close substitute determine the nature of elasticity.
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