Finance Session - Post 12

[Nordicsupreme]

Dear Zevist Family,



Today we will be discussing about the Elasticity of Demand and the Various Kinds of Products categorized on the basis on the responses to demand of the said product as a factor of its price.



I got the idea to write on this topic based on an interaction regarding the capping of prices of goods, if possible.

Elasticity of Demand​

Definition taken from Investopedia: Price elasticity of demand measures how a change in price affects a product's demand. If a price change creates a large change in demand, it is considered elastic. If a price change creates a small or no change in demand, it is inelastic.





Primarily there are three types of Elasticity that are generally studied:

1. Price Elasticity of Demand : Price elasticity of demand refers to changes observed in demand of a product as a factor of changes in price of the product
2. Income Elasticity of Demand : This elasticity tracks the changes in demand of a product as a factor of changes in the income levels of the consumer groups
3. Cross Elasticity of Demand : This form of elasticity studies the changes in demand levels of products as a facor of changes in prices of other goods

Type 1 : Price Elasticity​

As discussed earlier, this form of elasticity studies the changes in demand of a product as a factor of changes in prices of the goods/services being provided



P.E.D. =% change in quantity% /change in quantity price

As one can naturally gauge the price and demand are negatively correlated i.e. an increase in price of a product is generally met with a reduction in demand of the product



Degrees of Elasticity: I have taken this taken directly from the link attached underneath for easy reference.



Link : https://www.investopedia.com/terms/p/priceelasticity.asp

Type of Elasticity	Net Effect	Calculated Price Elasticity of Demand
Perfectly elastic	Demand declines to zero	Infinity
Elastic	Significant change in demand	Greater than 1
Unitary elasticity	Equivalent percentage change in demand	1
Inelastic	Insignificant change in demand	Less than 1
Perfectly inelastic	No change in demand	0

Importance of Understanding Price Elasticity of Demand​

• Companies when they introduce a new product or revamp present products are often facing an important question of how to price their products in a way that demand is optimal (This is one of the important 4P’s of Marketing)
• Government Policies & Influence in International Trade: Governments often need to make strong decisions in terms of how products are to be priced in the domestic markets. Since the Government has many stakeholders, they need to account for a multiple of factors that might come into play when they try to set price caps for certain services/goods.
• The recent move by Donald Trump to introduce tariffs to help defend and grow local businesses is nothing new. The Government has been doing similar works for multiple years particularly in the Agricultural sector. Providing relief to farmers and competitiveness to domestic farmers in the International Market through provision of subsidies and government grants.
• A useful link to study this: https://usafacts.org/articles/federal-farm-subsidies-what-data-says

Type 2: Income Elasticity of Demand​

These are products whose demand changes when with a change in the income levels of consumers.

Similar to Price Elasticity, there are various kinds of degrees if elasticity based on the ratios

Type of Goods	Value of Income Elasticity Ratio	Examples
Veblen Goods	> 1	Air travel, jewellery, Rolex Watches
Ordinary Goods	0 to 1	Food grains, soap
Essential Goods	0	Salt, insulin
Inferior goods	< 0	Used clothes, Public Transportation

Example of greater sales in Veblen Goods as the Income of population increases can be understood with the example of increase in sales of luxury cars in China ever since its economic boom: https://time.com/22845/chinas-road-show/

Type 3: Cross Elasticity of Demand​

Definition : measures the percentage change in quantity demand for a good after a change in the price of another (Source : https://www.economicshelp.org/microessays/equilibrium/cross-elasticity-demand/)

This can lead to three types of goods:

• Substitute Goods: They are positive cross elasticity of demand
• Complementary Goods: these have a negative cross elasticity
• Unrelated Goods: the change in demand of one type of goods has no effect on the demand of other type of goods.

This topic is of importance since this also includes the question of tariffs and how it affects the domestic industry and its effects on supply and demand. A useful link to study this relation in terms of the US Economy can be accessed through: https://www.mdm.com/company_article...-future-of-tariffs-and-distributors-response/



Thank you! Feel free to add/correct any thing you want

 

[Nordicsupreme]

A lecture that explains the concept of elasticity in detail :

I recommend everyone interested in the topic to listen to the video once for conceptual clarity

 

[Nordicsupreme]

An interesting video that discusses Government intervention in the markets on Supply & Demand :

 

[Alexander666]

Well done. All of your posts deeply explains the nature of finances. Money is very important asset and every Zevist should learn about it.

 

[Hidden Warrior [NG]]

Thank you !