Introduction to Demand Elasticity Example
Now we will discuss some of the examples to understand the demand elasticity and how its effects in managerial decision making, as demand elasticity is the important factor to analyze the demand for any product or service. As the demand for any product would be affected by the price of the product, the income level of the consumer for that particular product or another substitute product in the market. There are various examples to explain demand elasticity for each variable but we will check some of the main real-life examples.
Examples of Demand Elasticity
Below are the Examples of Demand Elasticity,
1. Price Elasticity of Demand
Price is an important variable to affect the demand for any product or service. It is a concept of changing in demand for any commodity due to changes in the price of the commodity. It is assumed the income of consumers, taste and the price of another substitute to be constant to measure price elasticity of demand.
It is measured as a % change in the quantity of any commodity divided by the % change in the price of the commodity. We can use below formula to calculate the price elasticity of demand,
Price Elasticity of Demand (EP) = (% Change in Demanded Quantity) / (% Change in Price)
Or
Price Elasticity of Demand (EP) = (Change in Quantity/Original Quantity) * (Original Price/Change in Price)
Example – 1
For example, suppose the price of one commodity decreases from $10 to $9 per unit and because of this, the demanded quantity for that particular commodity has been increased from 100 to 120 units.
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In the above example,
- Change in Price = $10 – $9
- Change in Price = $1
- Change in Demanded Quantity = 120-100
- Change in Demanded Quantity = 20 units
We will calculate the price elasticity of demand for this price change for the same commodity by above-explained formula,
- Price Elasticity (EP) = (20/1) * (10/100)
- Price Elasticity (EP) = 2%
So, because of the price fall of $1, the quantity demanded has been increased by 2%.
- The commodity is said to be elastic when the changes in quantity demanded are huge but the price of the commodity is changed very little. We can see these kinds of situations for commodities for which there are so many alternatives. For example, when the price of fairness cream decreases, the consumer will buy more quantity of the same fairness cream as compared to other alternatives.
- On the other side, the commodity is said to be inelastic, when the demanded quantity for the commodity changes very less in response to the price change.
2. Income Elasticity
Income is another variable that affects the demand for any commodity. Income Elasticity of demand refers to the sensitivity of the quantity demanded to a change in the income of the consumer for a commodity.
It is measured as a % change in the demanded quantity divided by the % change in the income of consumers for a particular commodity.
Income Elasticity of Demand (EI) = ( % Change in Demanded Quantity/% Change in Income)
Or
Income Elasticity of Demand (EI) = (Change in Quantity/Original Quantity) * (Original Income/Change in Income)
The income elasticity of demand could be seen with luxurious commodities. When the income of one’s increases, the person would be spending more on branded and luxurious commodities. The higher the income elasticity for any commodity means the higher sales for the commodity at the time income raises of the consumer.
The following are the best examples of positive income elasticity,
- Luxurious commodities, such as wines, high-quality chocolates, branded clothes.
- Expensive smartphones.
- Clubs and Gym membership.
- Sports cars.
- Private taxis instead of buses or any other public transport.
Example – 2
Let’s take one example of a consumer A whose income was $2000 and he was using public transport most of the time and using private cab only 10 times in a month. His salary increases to $2500, due to that he started spending more on private cab by 20 times instead of public transport in a month. We will calculate income elasticity for this commodity from the above-mentioned formula,
Income Elasticity of Demand (EI) = (Change in Quantity/Original Quantity) * (Original Income/Change in Income)
- Income Elasticity of Demand (EI) =[ (20-10)/10 ] *[ 2000/(2500-2000) ]
- Income Elasticity of Demand (EI) = (10/10) * (2000/500)
- Income Elasticity of Demand (EI) = 4
So in the above example, we can see that income elasticity for private taxi service is 4 which is highly elastic. The consumer tends to spend more on private taxis when they earn more income.
3. Cross Elasticity
This is the other concept of elasticity of demand which explains the sensitivity of quantity demanded of any commodity when the price of the other substitute products changes.
The cross elasticity of demand is always positive as the demand for one commodity will definitely be increased when the price of substitute product increases.
For example, if the price of the coffee increases, the demand for tea in the market will increase.
Cross Elasticity of demand can be calculated as % changes in the demanded quantity of product A divided by % change in the price of product B,
Cross Elasticity of Demand (EA.B) = (% Change in Demanded Quantity of Product A) / (% Change in Price of Product B)
Example – 3
Let’s understand this by the example of two coke brands A and B. Suppose in a quarter, the quantity demanded of Coke A is increased by 12% due to the price of Coke B has been increased by 15%.
According to the formula,
- Cross Elasticity of Demand (EA.B) = (12%) / (15%)
- Cross Elasticity of Demand (EA.B) = 0.80
So when we see that the cross elasticity of demand is positive for Coke A and Coke B, it means these 2 are substitute products and the changes in the price of one product would affect the demanded quantity of another product.
Conclusion
So as per the detailed discussion about the elasticity of demand, we can conclude in the following points,
- Demand elasticity is an important concept to analysis of demanded quantity in the future for any product. It represents the sensitivity of quantity demanded by any product when changes in other economic variables, such as the price of the product, income of the consumer and price of other substitute products.
- There are three types of elasticity, price elasticity of demand, income elasticity of demand and cross elasticity of demand.
- This concept allows firms or businesses to forecast the changes in total revenue for any product with a projected change in economic variables.
Recommended Articles
This is a guide to the Demand Elasticity Example. Here we discuss the various examples of Demand Elasticity along with the Examples of Price Elasticity, Income Elasticity, and Cross Elasticity. You may also have a look at the following articles to learn more –
