Elasticity of the request

The elasticity of the request is an economic concept which makes it possible to measure the degree of Sensibilité of the Demande to the variations of Price (“elasticity-price”) or Returned S (“elasticity-income”).

Elasticity-price

The elasticity-price is defined like the relationship between the percentage of variation of the request for a well and the percentage of variation of the price of this good. This report/ratio is generally negative because when the price increases, demand decreases and reciprocally. (Q = Quantity, P = Price)

One can distinguish three particular cases:

When elasticity is null, the request does not vary when the price varies. The request remains unchanged whatever the price. It is in particular the case of the products of first need: although the price increases, consumption is maintained because there exist little substitute products. When the price drops, the request necessarily does not increase. The effect can be accentuated if there does not exist substitute product (example: pastes replaced by rice or the apple-of-ground). A null elasticity in the short run can however prove nonnull long-term, because the raising of prices can push in the search of new substitute products. Oil, for example, is a nonsubstitutable good in the short run but, on the long run, the increase in its price can support the exploitation of new energy sources.
When elasticity is infinite, a small change of price involves a great change of request. It is for example the case of the products of mode whose sales crumble in crisis period and multiply by ten in period of growth.
When elasticity is positive, the request increases with the price. One can then distinguish two types:

* a well of Giffen (according to Robert Giffen) is a type of good of first need (example: bread); when its price increases, the request can also increase for this good and decrease for goods of more expensive substitution (ex: meat). This paradox generally applies to hearths with low-incomes: the price of a good has increasing, they cannot substitute the good B for it relatively expensive, even if its price remains stable. They are then constrained to reduce their consumption of good B to balance their budget and to defer well this consumption on good A.

* a of Veblen (according to Thorstein Veblen) is a type of good of luxury (ex: the perfume); when it is not “not rather expensive” (i.e. its price does not reflect its Positionnement top-of-the-range) its demand is low (either because the perceived Qualité is lower, or because it is not any more a Symbole of statute). The economists also define the cross concept of elasticity-price . It is defined as the relationship between the percentage of variation of the request for a good and the percentage of variation of the price of another good.

a positive cross elasticity means that the raising of prices of good involves the increase in the demand of another good. The two goods are thus substitutable.

a negative cross elasticity means that the raising of prices of good involves the reduction in the request for another good. The two goods are then known as complementary. For example, the fall in the prices of readers DVD involves an increase in the demand of DVD.

a null cross elasticity means that the two goods are independent.

It should be added that the cross concept of elasticity-price is particularly useful as regards policy of competition. To determine the extent of a market and to determine if a company is in situation of dominant position abuse, it is indeed necessary to see up to which point various products are substitutable (e.g. Coca and Pepsi). The concept of cross elasticity price is then useful to determine if two goods belong to the same market, and if the authorities of competition must start an action.

Elasticity-income

The elasticity of the request compared to the income is defined like the relationship between the percentage of variation of the request for a well and the percentage of variation of the Revenu. It measures the impact of a variation of the income of a consumer on his request for a particular good.

As all the goods do not have the same elasticity-income, the increase in the income changes the structure of consumption. One can distinguish three categories of goods:

lower goods : the demand for a consumer in this good decreases when its income increases (elasticity-income negative). They are goods of bad quality for which the consumers prefer to substitute new goods when their income allows it.

normal goods : the request of a consumer in this good increases when its income increases in a proportion lower or equal to 1 (elasticity-income ranging between 0 and 1). One also speaks about necessary goods .

higher goods or goods of luxury : the request of a consumer in this good increases in a way faster than its income (elasticity-income strictly higher than 1).

This classification was stated for the first time by Ernst Engel.

See too

elasticity of demand

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