Elasticity in Demand/Supply

Introduction

Elasticity in demand refers to the amount of change in the quantity demanded of the product for a percentage increase or decrease in its price. It is also called as price elasticity of the demand. It also can be called the sensitivity of the consumers to a change in the price of a product. If the price of a good increases, customers may switch to other less expensive alternatives, leading to a higher quantity of demand decrease. If there are no alternatives, customers won’t be able to switch, hence the small number of demand decreases. Price elasticity of demand calculates the shift in the degree of the demand curve (Gittins, 2014). Usually, the luxury goods or goods having necessity have greater elasticity. But some products, which are actually not a necessity, can be elastic in nature, for ex- cigarettes. The availability of substitutes or alternatives increases the elasticity of a product. There is also a relationship between the revenue and the elasticity of a product. If there is a rise in the price of a product that is inelastic, total revenues rise (Weatherburn., 2012). Fall in the price of the product, which is elastic leads to a rise in revenue. There are several determinants of elasticity such as if is a necessary good, availability of substitutes if it is more or less elastic in the long run and inexpensive goods. Substitutes will have positive effects especially those are close substitutes, for ex- a rise in the price of Coke will lead to an increase in demand for Pepsi, because both are very close substitutes for each other. Complementary goods will have a negative effect on each other, for the ex- rise in the price of computers will automatically lead to falling in demand for computer games. Thus, would lead to negative cross elasticity demand. Elasticity can be differentiated into different types like Elastic, Perfectly Elastic, Inelastic, Perfectly Inelastic and Unit Elasticity based on the elasticity of the demand. Price elasticity is mostly negative. Appliances such as cars and non-distinct essentials show elasticity of demand as compared to goods like food, clothing and medicine. In this assignment, the theory of elasticity of demand is studied. The elasticity of demand will be explained relating to two articles of the Sydney Morning Herald (Słowiński, Greco & Matarazzo, 2014).

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Working of Elasticity of Demand

The first article of Sydney Morning Herald “Why changing a drug law is a political problem “is taken into consideration for understanding the elasticity of demand. In this article, the proscription of illegal use of drugs is talked about. Even if the illegal use of drugs is prohibited people do not stop using them. In the above-mentioned article, the author states that explains the prohibition of illegal use of drugs by working of elasticity of demand. Prohibition of a particular product increases its price. The suppliers engaged in the production of drugs demand higher prices for refunding the risks taken by them. The increased price of illegal drugs is beneficial. Economists explain that when there is a rise in the price of drugs by 1 per cent, the demand tends to fall by 1 per cent too. Having elasticity close to zero, it states that a rise in the price of drugs by 1 per cent has minimal effect on its demand. Actually, the price elasticity is not zero, and an increase in the price of drugs affects the demand (Seiler, 2012). For ex- Let’s take the example of Heroin, which is an addictive and illegal drug. But the price elasticity demand for it varies from -0.32 to 0.72. Estimation for other drugs like Marijuana and Cocaine is even more variable. It can be assumed that with the rise in price to 10 per cent, consumption can reduce up to 9.3 per cent. The author has been able to justify why prohibition is better for reducing the consumption of these drugs. The elasticity of demand can also be applied in various examples of daily life (Warner, 2016).

Now, we take the second article into consideration that explains how an increase in price has led to a decrease in demand for electricity. It shows how the residential users of electricity have substantially reduced their consumption.  A sudden change in the consumption of electricity by the resident users was observed when the prices of electricity retailing increased due to high expenditure on distribution and transmission of electricity to cater for the growing demand in hot summer (Zeleny, 2012). People of Australia started looking for an alternative leading to a fall in demand of about 19 per cent. The demand for a product having an alternate commodity or a number of substitutes will be highly elastic. This is because a small change in the price of a product would compel the customers to go for another substitute.  Therefore, after observing the rise in electricity bills, the people of Australia tried to switch over to different alternatives which were available. This led to the decrease in demand for electricity as people were not any more interested in power consumption. Hence, it can be seen that elasticity of demand is present in every field (Warner, 2016).

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Conclusion

Hence, from the study of the above articles, it is found out that knowledge about the elasticity of demand must be compulsory to create a favourable climate in any field. In the first article, it can be concluded that prohibition of illegal use of drugs can be proven beneficial, with the use of elasticity in demand (Seiler, 2012). In the second article, it has been found that consumption of electricity was reduced significantly due to increased prices. People of Australia found alternative ways for electricity. Thus, it can be concluded that the concept of elasticity of demand can be applied to various fields.

Reference

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Słowiński, R., Greco, S. and Matarazzo, B., 2014. Rough-set-based decision support. In Search Methodologies (pp. 557-609). Springer US.

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