Demand Elasticity Measures

Question: Discuss about the Demand Elasticity Measures. Answer: Introduction: Demand elasticity measures the sensitivity of the demand for a commodity to changes in other economic parameters such as the price of the commodity (price elasticity), the income of the consumers (income elasticity), the price of other related commodities (cross-price elasticity), etc. It is defined as the percentage or proportionate change in the demand for a good when any of these economic factors changes by a unit percent. The price elasticity of demand for physicians services is 0.6 implies that when the service charge of a physician increases by 1 percent, the demand for physician services falls by 0.6 percent. Again, the income elasticity of demand for physicians services is 0.6 means that when the income of an individual increases by 1 percent, the demand for physicians services increases by 0.6. Thus, demand for physician services is inelastic (0.6 1). This is because physicians services can be categorized as an essential service or a necessity which is why changes in price or income do not affect the demand as much. Moreover, there is no close substitute of physicians services such than an increase in price would shift the demand. Hence, cross-price elasticity is also low. The demand elasticity for foreign travel is 4.0 implies that when the cost or the price of foreign travel increases by 1 percent, the demand for foreign travel falls by 4 percent. Again, if the income of a consumer increases by 1 percent, the demand for foreign travel will increase by 4 percent. Hence the demand for foreign travel is highly elastic (4 1). Foreign travel is a luxury consumption service and hence the demand elasticity is high, that is, the proportionate change in demand is much more than the change in price or income. The demand is highly sensitive to other economic parameters. Again, the closest substitute to foreign travel is domestic tour and if the price of that falls by 1 percent, the demand for foreign travel will fall by 4 percent. The demand elasticity for newspapers is 0.1 means that the demand for newspapers will fall by 0.1 percent when the price rises by 1 percent or it will rise by 0.1 percent when the consumers income increases by 1 percent. A newspaper being a necessary commodity, the demand does not change much for a unit change in price or income. Hence the demand for newspapers is inelastic (0.1 1). The demand elasticity for radio and television receivers is 1.2 for every 1 percent rise in the price of radio and television the demand for the same falls by 1.2 percent or the demand increases by 1.2 percent for every 1 percent increase in income. Generally radio and television receivers are considered luxury commodities. Hence the demand is elastic (1.2 1) the proportionate change in the quantity demanded is more than the change in the price or income. The demand is more than perfectly elastic. When the price of other forms of entertainment falls by 1 percent, the demand for radio and television falls by 1.2 percent hence the cross price elasticity is high. References Mankiw, N 2006, Principles of Microeconomics, South Western Educational Publishing, USA. Pindyck, R Rubinfeld, D 2005, Microeconomics, Pearson Education, USA. Varian, R 2005, Intermediate Microeconomics: A Modern Approach, W.W. Norton Company, USA. Gallo, A 2015, A Refresher on Price Elasticity, viewed 16 August 2016, https://hbr.org/2015/08/a-refresher-on-price-elasticity.