The Three Elements of Elasticity - Essay Example

Elasti Table of Contents Introduction 3 Part 3 Explanation The Three Elements Of Elasti 3 Price Elasti Of Demand 3 Income elasti ofdemand 5 Cross Price Elasticity of Demand 6 Part 2 8 Practical Application Of The Concept For Business Decision Making 8 Price Elasticity of Demand 8 Income Elasticity Of Demand 9 Cross Price Elasticity Of Demand 9 Benefits Obtain By The Organizations By The Application of The Three Elements 10 Price Elasticity of Demand 10 Income Elasticity of Demand 11 Cross Price Elasticity of Demand 11 Conclusion 13 References 14 Introduction Elasticity of demand is a measure that quantifies the rate of change in goods demanded on the underlying factors. this even helps in measuring the different responses of the quantity demanded for a particular product or services is noted to be changing based on the needs and preferences of certain factors that defines the quantity demanded for a specific product (McEachern, 2008). Based on the nature and effect of the factors on quantity demanded elasticity of demand is classified into three types ‘Price Elasticity ’, ‘Income elasticity ’, and ‘Cross Elasticity’ (Jain & Ohri, 2010). The essay explains the three elements of elasticity and their respective implication on the organisations. By elaborating on the different needs of elasticity the essays proposes to identify the implications of the concepts on the organisations. Furthermore, with the use of examples, the paper intends to illustrate the different concepts that are related with the practical implications of the same on the organisational backdrop. Part 1 Explanation The Three Elements Of Elasticity Price Elasticity Of Demand The ‘price elasticity of demand’ is defined as “is the ratio of the percentage change in the quantity demanded of a commodity to a percentage change in price” (Jain, & Ohri, 2010). Price is one of the most important factors that determine the amount of goods that is likely to be demanded by the consumers. The change in price of a product has a direct impact on the overall demand of a consumer. This measure of elasticity helps in identifying the sensitivity of consumers based on their individual needs of demanding a particular product as per the change in price. The price elastic goods are often noted to be having a huge shift in the quantity demanded based on a slight shift in the price of the product. It is noted that determination of price of a commodity in the economy is quite significant (Hirschey, 2008). Price elasticity is the most common type of elasticity of demand and is measured in terms of the reaction that a product has towards change in price. The following equation helps in determining the measure of price elasticity of demand. The above equation illustrate that the price elasticity of demand helps in measuring the sensitivity of a product towards percentage change in quantity demanded based on price. The same could be justified using graphical representation. (Sources: Jain & Ohri, 2010) The graph depicts that at A the price of the commodity is denoted by P whereas the demand of the commodity is denoted as Q. Notably, with the fall in the price of commodity from P to P1 the quantity of the commodity increases from Q to Q1 the same is represented at point C. This suggests that price and quantity are inversely proportional to the price of the same, as with a fall in price by one unit the quantity demanded increases. Price is noted to be the sole component to develop the demand of the goods. The percentage change in price of a commodity is one of the major determining factors for demand of the same in the long run. The measures of price elasticity help to identify the requirement of commodity as per the demand for the product. Income elasticity of demand The income elasticity of demand can be defined as “the ratio of the percentage change in the quantity demanded to the percentage change in income” (Jain, & Ohri, 2010). Income elasticity of demand represents the sensitivity of consumers towards a particular commodity based on their income earned. Therefore, income elasticity of demand can influence the demand of a product even when the price of the same remains unchanged. Income is one of the most important factors, which could determine the quantity of goods that is being consumed by the consumers (McEachern, 2008). The measure of income elasticity helps in recognizing the probable amount of demand that the consumers may project based on their individual income where the consumers is demanding product as per the change in income. As a result of income elasticity there is a chance of huge shift in the quantity demanded based on a slight shift in the income of the consumers. The change in income of a consumer has a direct impact on the overall demand of quantity that is consumed by the consumers. The sensitivity of the income could be effectively calculated by the shift percentage change in consumption based on the change in come at constant price rate. The following equation helps in developing a better measure for the income elasticity of demand (Jain & Ohri, 2010). In the above equation, Ey denotes income elasticity of the product that reflects on the sensitivity of demand based on the change in income at stable price rate. Thus, it could be stated that determination of income of a consumers in the economy is quite important. (Note: Prepared for the current study) The graphical presentation that has been stated above depicts on the income elasticity of demand. at a constant price rate P0 the quantity demanded changes with the change in income. the denand curve shifts from Q0 to Q1 due to the increase in price there will be a simultaneious shift in the demand curve towards the origin based on the fall in price. Notably, the income elasticity curve does not follow the trend of ups and downs on a single slope as that of the price rather there is a shift in the demand curve. the same has been depeicted in the above picture using the demand curve D1 and D0. Cross Price Elasticity of Demand The cross price elasticity of demand can be defined as “a relationship between the change in price and quantity demanded of two related goods” (Jain & Ohri, 2010). The concepts that are related with the notion of cross price elasticity is majorly based on the effect of presence of substitutes. Demand for a good is dependent on the price of its substitutes. with the increase and decrease in the price of the substitutes there is a simultaneous decrease as well as increase in the demand of a commodity. additionally, there is alos an impact of incrsae as well as decrease in the price pof the complements. for instance with a rise in the cost of petroleum the demand for cars or other vehicles run on the fuel falls. Simultaneously, with a rise and fall in food items camn largely effect the consumption related with the same. For instance, with an increase in cost of tea, the demand of the same will fall but in turn this can probably augment the demand for coffee (Jain & Ohri, 2010). The cross price elasticity is measured using the following formulae: In the above equation, cross price elasticity of demand has been illustrated that reflects the concept that the proportionate change in price demanded could effectively affect the demand for another product. Additionally, a graphical reprtesentation has been provided in the following section to enhnace the understanding of the concept of cross price elasticity of demand. (Note: Prepared for the current study) The above graphical representation reflects the change in price of product X has a clear effect on the quantity demanded for product Y. This could even be noted that the with an increase in price of the of product X from P0 to P1, the increase in quantity for consumption for product Y is evident as the quantity shifts from Q0 to Q1. Thus, there is a direct proportion within the price of the product and quantity demanded. Additionally, the demand graph instead of sloping downwards, slopes upwards. Part 2 Practical Application Of The Concept For Business Decision Making The practical application of all the above mentioned elements can also be witnessed in the decision-making procedure of the compnaies operating in dissimilar industries in this modern day context. Hence, with this concern, a detailed elbaoration has been made in the following depicting the role play by such elements in supporting the modern companies to make effective decisions: Price Elasticity of Demand The practical application of the element concerning price elasticity of demand specifically in the context of decision-making procedre of the companies can be better understood with respect to pricing of different products and/or services that they deal with. Apart from having practical application of such element in product pricing, the same can also be witnessed in detemrining the impacts impose by the depreciation or the devaluation of currencies on the export earnings of the companies. It is worth mentioning that the application of price elasticity of demand would be applied on the pricing decisions maake by the companies, as this tends to bring about considerbale changes in the quanity of products being demanded based on price efficiency. The decision of dveloping a product also seems to be a vital one, as this may make the consumers to buy their respective products afforadbly. Income Elasticity Of Demand The element of income elasticity of demand also possesses certain attributes that affect the business decision-making procedure of the companies at large. It is obvious to the fact that the income of the consumers imposes certain amount of impact on the decisions make by the companies during the conduct of their respective business. In terms of determining practical application of the element of income elasticity of demand, it is to be affirmed that this particualr constituent tends to identify the income of the consumers as per the demand of the respective products. The practical application of this element in the business decision-making procedure can be reckoned as determining the kinds of products to be marketed to different market players, recognising the potential customers to whom mainly the products would be marketed, developing product life cycle and more importantly ascertaining the rise or fall in income elasticity. This particular element i.e. income elasticty of demand certainly contributes in making a specific business to run in a simple way with adopting effective marketing decisions in alignment with customers’ income. Cross Price Elasticity Of Demand The cross price elasticity of demand makes a situation of business to get differentiated as compared to others. It is quite obvious that consumers buy products after assessing the quality of the same. Thus, in this similar context, it will be vital to mention that the element of cross price elasticity of demand would make the organisations to describe the products that they deal with in accordance with the requirements of the potential customers. Specially mentioning, with the consideration of cross price elasticity of demand, the business can be able to assess the responsiveness attribute of the products and likewise deal with the same. This might contribute in making the businesses to take decisions accordingly, resulting in making firm changes to the product features. From the above analysis, it can be affirmed that the above discussed elements related to the subject of economics play a decisive part in improviisng the overall performnace of the businesses in various ways. These ways include modernising the product features in accordance with the requirements of the end users and marketing the products effectively based on considering certain crucial factors such as income level of the customers and product responsiveness among others. In relation to the above context, the discussion below will mainly focus on evaluating the benefits that can be reaped by the modern organisations opertaing in dissimilar industries by the application of the discussed elements. Benefits Obtain By The Organizations By The Application of The Three Elements There lay certain significant factors that impose considerable level of impact on the entire performance of the organisations and their respective rate of attaining greater success in future. In this context, such factors can be reckoned as price, supply and demand of a product. The benefits that could be obtained by the modern organisations from the above discussed elements have been explained hereunder. Price Elasticity of Demand It has been earlier mentioned that the element of price elasticity of demand impacts the decision-making procedure of the organisations in terms of regulating product prices and also determining the responsiveness of the same. While reflecting about how could the business organisations can be benefitted from this particular element, automobile industry has been taken into concern for discussion. It can be apparently observed that the quantity demanded by selling automobile products has made a greater impact in improvising the entire performance of the organisations with making significant contribution in attracting the customers. The automobile industry is noted to describe about the inelasticity as well as the elasticity of products that certainly aided in judging the impacts impose by depreciation or devaluation of currencies particularly on the export earnings of such organisations operating in the automobile industry (McEachern, 2008). For instance, the company i.e. Toyota Motor Corporation may reap the benefit of adequately ascertaining the selling price of its automotive products. Apart from this, the organisation may also judge the responsiveness as well as the sensitivity of its wide product range as per the market requirements. Income Elasticity of Demand Similar to price elasticity of demand, several business organisations may also obtain significant benefits from considering the element of income elasticity of demand. This might be owing to the reason that this specific element tends to examine the income level of the consumers, based on which adequate products and/or services can be provided to them for attaining their respective predetermined business targets. In relation to the above context, an example of Ford Motors is taken into concern. It has been apparently observed that the organisation focused at determining income elasticity of demand and willing to make greater success in terms of attaining superior customer satisfaction and is also willing to make a certain satisfaction in the business. Specially mentioning, the organisation has made greater development in the major functional areas such as examining the supply as well as the demand of the automotive products and more importantly evaluating the responsiveness of the same. Cross Price Elasticity of Demand It has been ascertained that the business organisations operating in this present day context are able to derive significant benefits by considering the element of cross price elasticity of demand. Such benefits can be ascertained in the form of determining the sensitivity of the products to be delivered to the end users and also promoting innovativeness in the same among others. For instance, Honda Motor Company, Ltd has obtained the benefits of ascertaining the risks involved while conducting varied operations and differentiating itself from others (Sexton, 2015). Conclusion Elasticity of demand helps in determining the sensitive index of a product in respect to the price of the same. Elasticity of demand is majorly divided into three major components that help in determining the effective marketing of the product. With the major types of elasticity being the income, cross as well as price elasticity the marketers can easily determine the responses that a product is likely to gain from its ready market. Price being one of the major determinants of the demand of a product it is likely to enhance the demand for the same based on the fluctuations of price. Correspondingly, the income elasticity as well as the cross elasticity of demand helps in determining the responses received from the demand of a product in terms of other component at fixed price. Additionally, by nurturing these components of elasticity organisations dealing with varied products can efficiently handle its marketing plans and enhance the credibility of the products that they are selling. The major sellers of the globe are nurturing the different economic scenarios to project the business growth and even develop the efficiency of the products that they are proposing in the market. Correspondingly, with the effective management of the different strategies the company could efficiently plan the different markets strategy to increase the supply of the same. References Hirschey, M., 2008. Fundamentals of Managerial Economics. Cengage Learning. Jain, T. R. & Ohri, V. K., 2010. Introductory Microeconomics and Macroeconomic. FK Publications. McEachern, W. A., 2008. Microeconomics: A Contemporary Introduction. Cengage Learning. Sexton, R., 2015. Exploring Economics. Cengage Learning. Read More