When a small change in price causes a large change the demand for a different good or service those goods or services are likely?

Elasticity of demand is an important variation on the concept of demand. Demand can be classified as elastic, inelastic or unitary.

An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small.
The formula for computing elasticity of demand is:

(Q1 – Q2) / (Q1 + Q2)     
(P1 – P2) / (P1 + P2)

If the formula creates an absolute value greater than 1, the demand is elastic. In other words, quantity changes faster than price. If the value is less than 1, demand is inelastic. In other words, quantity changes slower than price. If the number is equal to 1, elasticity of demand is unitary. In other words, quantity changes at the same rate as price.

Elastic Demand

Elasticity of demand is illustrated in Figure 1. Note that a change in price results in a large change in quantity demanded. An example of products with an elastic demand is consumer durables. These are items that are purchased infrequently, like a washing machine or an automobile, and can be postponed if price rises. For example, automobile rebates have been very successful in increasing automobile sales by reducing price.

Close substitutes for a product affect the elasticity of demand. If another product can easily be substituted for your product, consumers will quickly switch to the other product if the price of your product rises or the price of the other product declines. For example, beef, pork and poultry are all meat products. The declining price of poultry in recent years has caused the consumption of poultry to increase, at the expense of beef and pork. So products with close substitutes tend to have elastic demand.

An example of computing elasticity of demand using the formula is shown in Example 1. When the price decreases from $10 per unit to $8 per unit, the quantity sold increases from 30 units to 50 units. The elasticity coefficient is 2.25.

Inelastic Demand

Inelastic demand is shown in Figure 2. Note that a change in price results in only a small change in quantity demanded. In other words, the quantity demanded is not very responsive to changes in price. Examples of this are necessities like food and fuel. Consumers will not reduce their food purchases if food prices rise, although there may be shifts in the types of food they purchase. Also, consumers will not greatly change their driving behavior if gasoline prices rise.

An example of computing inelasticity of demand using the formula above is shown in Example 2. When the price decreases from $12 to $6 (50%), the quantity of demand increases from 40 to only 50 (25%). The elasticity coefficient is .33.

This does not mean that the demand for an individual producer is inelastic. For example, a rise in the price of gasoline at all stations may not reduce gasoline sales significantly. However, a rise of an individual station’s price will significantly affect that station’s sales.

Unitary Elasticity

If the elasticity coefficient is equal to one, demand is unitarily elastic as shown in Figure 3. For example, a 10% quantity change divided by a 10% price change is one. This means that a 1% change in quantity occurs for every 1% change in price.

Don Hofstrand, retired extension value added agriculture specialist,

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Markets

Demand
You will learn about:

• the law of demand, individual and market demand, the demand curve
• the factors affecting demand - price, income, population, tastes, prices of substitutes and complements, expected future prices
• movements along the demand curve and shifts of the demand curve

You will learn to:
Examine economic issues

• examine the forces in an economy that tend to cause prices to rise

​
Apply economic skills

• graph a demand curve and predict the impact of an equilibrium
• calculate the price elasticity of demand using the total outlay method

Traditional economics sets out some  basic premises. Let's think these through and see where they are happening in our everyday lives.

• Demand is a function of price and consumers will generally buy less of an expensive product.
• There are a variety of other factors that influence people's choices for consumption, e.g. income, population, tastes, prices of substitutes and complements, expected future prices. These factors cause the whole demand curve to shift left or right.
• Consumers will not react to price changes in some products for particular reasons. This is referred to as inelastic demand.
• Consumers will react immediately to price changes in some products for particular reasons. This is referred to as an elastic demand.
• Inflation describes when the whole economy experiences price rises. Too much money in an economy causes inflation.​

Breakfast Cereal- Choosing a Price

Reference: https://core-econ.org/the-economy/book/text/07.html#71-breakfast-cereal-choosing-a-price

To decide what price to charge, a firm needs information about demand: how much potential consumers are willing to pay for its product. Figure 7.3 shows the demand curve  (the curve that gives the quantity consumers will buy at each possible price). for Apple-Cinnamon Cheerios, a ready-to-eat breakfast cereal introduced by the company General Mills in 1989. In 1996, Jerry Hausman, an economist, used data on weekly sales of family breakfast cereals in US cities to estimate how the weekly quantity of cereal that customers in a typical city would wish to buy would vary with its price per pound (there are 2.2 pounds in 1 kg). For example, you can see from Figure 7.3 that if the price were $3, customers would demand 25,000 pounds of Apple-Cinnamon Cheerios. For most products, the lower the price, the more customers wish to buy.

Click on the link above to find out more.

Nerd Alert

​If you were the manager at General Mills, how would you choose the price for Apple-Cinnamon Cheerios in this city, and how many pounds of cereal would you produce?

You need to consider how the decision will affect your profits (the difference between sales revenue and production costs). Suppose that the unit cost (the cost of producing each pound) of Apple-Cinnamon Cheerios is $2. To maximize your profit, you should produce exactly the quantity you expect to sell, and no more. Then revenue, costs, and profit are given by:

                                             Total Costs        = Unit Cost X Quantity
                                                                               = 2 X Q
                                              Total Revenue = Price X Quantity
                                                                               = P X Q
                                                Profit                  = Total Revenue - Total Costs
                                                                               = (P X Q) - (2 X Q)

So we have a formula for profit:

                                               Profit=(P−2)×Q
                                              
Using this formula, you could calculate the profit for any choice of price and quantity and draw the isoprofit curves, as in Figure 7.4. Just as indifference curves join points in a diagram that give the same level of utility, isoprofit curves join points that give the same level of total profit. We can think of the isoprofit curves as the firm’s indifference curves: the firm is indifferent between combinations of price and quantity that give you the same profit.

Want to know more? Head to this link to read and answer some demand-ing questions!

Can you bring a demand curve to life?

Are economists faking it until they make it?
You know it's there, when a price goes up you generally buy less of it and conversely, when a price goes down, you will go and buy more.
But it's hard to find a real demand curve. Listen to this podcast from Freakonomics and hear how Uber has provided economists with enough data to nail a demand curve down.

In your first assessment task you are researching factors around consumer's spending and saving patterns. This information will help you develop a rationale and move ahead with your research.

How does this all come together?

Price Elasticity - how quickly will consumers react when you change a price?

One of the critical elements of pricing is understanding what economists call price elasticity. ​Reference: https://hbr.org/2015/08/a-refresher-on-price-elasticity

What is price elasticity?
Most customers in most markets are sensitive to the price of a product or service, and the assumption is that more people will buy the product or service if it’s cheaper and less will buy it if it’s more expensive. But the phenomenon is more quantifiable than that, and price elasticity shows exactly how responsive customer demand is for a product based on its price. “Marketers need to understand how elastic, sensitive to fluctuations in price, or inelastic, largely ambivalent about price changes, their products are when contemplating how to set or change a price,” says Avery.
“Some products have a much more immediate and dramatic response to price changes, usually because they’re considered nice-to-have or non-essential, or because there are many substitutes available,” explains Avery. Take for example, beef. When the price dramatically increases, demand may go way down because people can easily substitute chicken or pork.

How is it calculated?
This is the formula for price elasticity of demand:
Price elasticity of demand  =

% change in P

Let’s look at an example. Say that a clothing company raised the price of one of its coats from $100 to $120. The price increase is $120-$100/$100 or 20%. Now let’s say that the increase caused a decrease in the quantity sold from 1,000 coats to 900 coats. The percentage decrease in demand is -10%. Plugging those numbers into the formula, you’d get a price elasticity of demand of:

= -.5 or .5
                                                .20
Products and services can be:

• Perfectly elastic where any very small change in price results in a very large change in the quantity demanded. Products that fall in this category are mostly “pure commodities,” says Avery. “There’s no brand, no product differentiation, and customers have no meaningful attachment to the product.”
• Relatively elastic where small changes in price cause large changes in quantity demanded (the result of the formula is greater than 1). Beef, as discussed above, is an example of a product that is relatively elastic.
• Unit elastic where any change in price is matched by an equal change in quantity (where the number is equal to 1).
• Relatively inelastic where large changes in price cause small changes in demand (the number is less than 1). Gasoline is a good example here because most people need it, so even when prices go up, demand doesn’t change greatly. Also, “products with stronger brands tend to be more inelastic, which makes building brand equity a good investment,” says Avery.
• Perfectly inelastic where the quantity demanded does not change when the price changes. Products in this category are things consumers absolutely need and there are no other options from which to obtain them. “We tend to see this only in cases where a firm has a monopoly on the demand. Even if I change my price, you still have to buy from me,” explains Avery.​

When a small change in price leads to a large change in demand the demand is?

When small changes in price lead to relatively large changes in quantity demanded we say that?

When the change in demand is greater to the change in price it is called?

When demand is elastic a small change in price leads great change in the quantity demand we call it?