Economic analysis of the meaning of the elasticity of demand in the variation of prices
Greetings friends, in this opportunity I want to share with you an academic analysis of how we can interpret the economic meaning of demand elasticity and how it influences the variation of prices of some marketable good.
In this case I want to be practical and concise, which is why I am going to carry out this analysis based on having to divide this article into two small phases. The first phase will explain the possible alternatives in relation to the result we can obtain in the calculation of the value of elasticity of demand in relation to price variation. The second part will explain an exercise taking a practical and real case that will serve as an example for the corresponding analysis based on the theory that will be explained in the first phase of this article.
Numerical calculation of demand elasticity
To calculate the elasticity of demand we will use a fairly simple but very useful formula which is as follows:
Ed: is the degree of elasticity of demand.
The degree of elasticity needs to be evaluated for a comparative range where the following circumstances are met:
1] If the result of the coefficient of elasticity (Ed) is equal to 1.
What can be deduced if the elasticity coefficient of demand does not equal 1 is that there is a unitary demand, where the practical meaning for the variation of prices is that an equal variation in the quantity demanded is generated, it is important to emphasize that in this condition there are no imbalances that are highly altered, since the relation of variation is unitary.
2] If the result of the coefficient of elasticity (Ed) is greater than 1.
If the coefficient of elasticity gives us a value greater than 1 it means that there is a greater variation in prices in relation to the quantity demanded.
3] If the result of the coefficient of elasticity (Ed) is less than 1.
If the coefficient of elasticity gives us a value less than 1 it means that the variation of existing prices does not generate a significant variation in the quantity of goods demanded.
In order to understand this theoretical support, a practical example is recommended, which is why I present the following example:
There is a variation in the price of a box of pencils that varies from initially costing 4 dollars to 3 dollars, all this occurs when there is an increase in the demand for boxes of pencils from an initial quantity of 20 boxes of pencils to a final quantity of 25 boxes of pencils.
For the above example we will substitute in the formula the demand elasticity coefficient and then analyze it:
From the result of -0.77 we must take the absolute value of that amount, so we can say that the coefficient of elasticity of demand is 0.77.
The corresponding analysis based on this real example is that 0.77 is less than 1 so several considerations can be made, one of which is that the coefficient of elasticity of demand has inelastic characteristics, the other important thing to note is that it does not generate a highly forced variation to generate the amount of pencil boxes demanded because of the variation in the fall in the price of pencil boxes.
Conclusion
The range of elasticity measured with the Ed coefficient is very important to know the impact on the demand of a product due to how its prices vary, this is very valuable from an economic point of view since it allows to predict the new production steps of a company that is in charge of producing certain commercial goods.
I hope you found this short and educational article interesting, we'll see you next time your friend says goodbye to you @carlos84.
Bibliography
Book of basic economics. Author: Max Valla
Thanks to you my dear friend for your good appreciation in this post, greetings and thanks for commenting.
Hello @carlos84
I had no idea that there was a formula for that, although I must say that it is not my area and that I really don't like these numerical things very much, but it is necessary to know about everything a little.
Hello my dear friend @josevas217.
With that formula we can calculate the elasticity coefficient of demand and with it we can make some analysis in relation to how the demand will be in relation to the variation of prices. Greetings and thanks for commenting
Wow, this post is heavy and educative as well. Demand is one topic I so much love while in school back then. Thanks for refreshing my memories.
I am very pleased that this post reminds you of your years as a student.
Hello friend @carlos84
Great content because the topics of economics are very important, and are part of our daily lives, knowing a little more helps us in our day to day.
Greetings, thank you for sharing your article.
Certainly friend @sandracarrascal these academic elements of economics help us understand the basics of economics. Greetings and thanks for commenting
Hello friend, the truth is an interesting topic, you know a lot about your area, the truth is I don't know much about the topic hehehe thanks for giving us new information!
Hello friend @franyeligonzalez, thanks to you for always supporting my articles. Greetings and blessings.
Greetings friend @carlos84, interesting article, I did not know this coefficient and how it influences the variation of prices, but your explanation allows us to easily understand the meaning of the elasticity of demand in the variation of prices. The economy has many terms with which we should at least be familiar, since there are many factors that can influence the price variation of a good or service, as in this case Ed's coefficient, it is necessary to know a little about this since the economy moves us daily.