Change in demand
Date: 2015-10-07; view: 526.
1.________________________________ Consumers react to a change in price by changing the quantity demanded, although the size of their reaction can vary. This response is known as demand elasticity - the extent to which a change in price causes a change in the quantity demanded. There are elastic, inelastic and unit elastic demand elasticity.
To estimate elasticity, it is useful to look at the impact of a price change on total expenditures, or the amount that consumers spend on a product at a particular price. This is sometimes called the total expenditures test.
2. ________________________________We find total expenditures by multiplying the price of a product by the quantity demanded for any point along the demand curve. To illustrate, the total expenditure under point ain Panel A of Figure 1 is $6, which is determined by multiplying two units times the price of $3. Likewise, the total expenditure under point bin Panel A is $8, or $2 times four units. By observing the change in total expenditures when the price changes, we can test for elasticity.
The relationship between changing prices and total expenditures is summarized in the four panels of Figure 1. The figure shows how a decrease in price from $3 to $2 impacts total expenditures for each of the demand curves. In each case, the change in expenditures depends on the elasticity of the demand curve.
Figure 1.
| Panel A. Elastic demand. When the price drops by $1 per unit, the increase in the quantity demanded is large enough to raise total expenditures from $6 to $8. The relationship between the change in price and total expenditures for the elastic demand curve is described as “inverse.” In other words, when the price goes down, total expenditures go up. | Panel B. Inelastic demand. In this case, when the price drops by $1, the increase in the quantity demanded is so small that total expenditures fall below $6. For inelastic demand, total expenditures decline when the price declines. | Panel C. Unit elastic Demand. This time, total expenditures remain unchanged when the price decreases from $3 to $2. |
3. __________________________________The relationship between the change in price and the change in total expenditures is shown in Panel D. If the changes in price and expenditures move in opposite directions, demand is elastic. If they move in the same direction, demand is inelastic. If there is no change in expenditure, demand is unit elastic.
4.____________________________________While this discussion about elasticity may seem technicaland somewhat unnecessary to you, knowledge of demand elasticity is extremely important to most businesses. Suppose, for example, that you run your own business and want to do something that will raise your revenues. You could try to stay open longer, or you could try to advertise in order to increase sales. You might, however, also be tempted to raise the price of your product in order to increase total revenue from sales.
This might actually work in the case of table salt or medical services, because the demand for both products is generally inelastic. However, what would happen if you sold a product with elastic demand? If you raise the price, your total revenue - which is the same as consumer expenditures - will go down instead of up. This outcome is exactly the opposite of what you intended!
This is exactly why some businesses experiment with different prices when they introduce a new product to the market. They may adjust prices repeatedly to see how customers respond to new prices. If a business can determine a new product's demand elasticity, it can find the price that will maximize total revenues. This is why
demand elasticity is more important than most people realize.
5._________________________________ What makes the demand for a specific good elastic or inelastic? To find out, we can ask three questions about the product. The answers will give us a reasonably good idea about the product's demand elasticity.
Can the Purchase Be Delayed?Sometimes consumers cannot postpone the purchase of a product. This tends to make demand inelastic, meaning that the quantity of the product demanded is not especially sensitive to changes in price.
Are Adequate Substitutes Available?If adequatesubstitutes are available, consumers can switch back and forth between the product and its substitute to take advantage of the best price.
Does the Purchase Use a Large Portion of Income?The third determinant is the amount of income required to make the purchase. If the amount is large, then demand tends to be elastic. If the amount of income is small, demand tends to be inelastic.
Words and phrases to be remembered:
variable - змінна величина
to occur - відбуватися
to remain - залишатися
to cause - спричиняти
to appear - з'являтися
a movement – рух
to shift - переміщатися
original - початковий
a determinant - визначник
consumer tastes - споживчі смаки
related goods - супутні товари
expectations - очікування
to vary - мінятися
a response - відповідь
an extent - ступінь
to estimate - оцінювати
an impact - вплив
total expenditures - загальні витрати
to multiply - множити
to observe – спостерігати
relationship – зв'язок, взаємовідносини
inverse - зворотний
a direction - напрямок
to run a business - займатися підприємницькою діяльністю
revenues - надходження
to advertise - рекламувати
to be tempted - спокушатися
to introduce - вводити
to adjust - коректувати
to delay (syn. to postpone) - відкладати
to switch back and forth between - переключатися
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