ELASTICITY OF DEMAND

Demand elasticity refers to the reaction or response of the buyers to changes in price of goods
and services. As mentioned earlier, buyers tend to reduce their purchases as price increases, and tend to
increase their purchases whenever price falls. These are logical reactions to price changes.

There are five types of demand elasticity or types of reactions of buyers to price changes of goods and
services:
1. ELASTIC DEMAND - A change in price results to a greater change in quantity demanded.

2. INELASTIC DEMAND - A change to price results to a less change in quantity demanded.

3. UNITARY DEMAND - A change in price results to an equal change in quantity demanded.

4. PERFECTLY ELASTIC DEMAND - Without change in price, there is an infinite change in quantity
demanded.

5. PERFECTLY INELASTIC DEMAND. A change in price creates no change in quantity demanded.

Types of demand elasticity showing the various degrees of reactions of buyers brought about by price
change.
 DETERMINANTS OF DEMAND ELASTICITY
1. NUMBER OF GOOD SUBSTITUTES. Demand is elastic for a product with many good substitutes.
An increase in the price of such product induces buyers to look for good substitutes. On the
other hand, products without good substitutes have inelastic demand. Buyers have little or no
choice except to purchase them if they really need them. An example is electricity for a factory.

2. PRICE INCREASE IN PROPORTION TO INCOME. If the price increase has very little effect on the
income or budget of the buyers, demand is inelastic. For example, a 40 percent increase in the
price of a needle or candy means only a few centavos.

3. IMPORTANCE OF THE PRODUCT TO THE CONSUMERS. Luxury goods are not very important to
P
many Filipinos. Examples are diamond rings, sports cars, expensive wines, elegant clothing, etc.
So, these are elastic. On the other hand, essential goods are very important to people. Rice is
important to all consumers. Electricity is important to factory owners. Gasoline is important to
the transportation industry. All of these are inelastic.
 ECONOMIC SIGNIFICANCE OF DEMAND ELASTICITY
A good knowledge of demand elasticity helps the businessmen in planning their pricing
strategies. In the case of the government, it guides the economic managers in formulating appropriate
tax programs. Clearly, the market price of a product influences wages, rents, Interests, and profits. With
the right pricing strategy, businessmen may attain the following goals:
 achieve target return on investment;
 maintain or improve a share in the market;
 meet or prevent competition.
 maximize profits.

Here are some practical examples of economic significance of elasticity of demand:

1. WAGE DETERMINATION. If the product has elastic demand, a reduction in its price increases
quantity demanded. This means more sales and more profits. The company is in a position to
raise the wages of its workers. But if demand is inelastic, a reduction in its price has very little
effect on sales. Such price cut may even affect the viability of the company.

2. FARM PRODUCTION GUIDE. Most agricultural products like' rice, coconut and sugar are
inelastic. Quantity demanded does not change much even if there is a big decrease or increase
in price. Whenever there is an overproduction of farm crops due to good harvest, prices of said
products decrease. As a result, total revenue or income of the farmers also declines.

3. MAXIMIZE PROFITS. A reduction in price causes more quantity demanded. Businessmen can
estimate how far they can cut their prices to be able to generate their target sales. Evidently, a
substantial price reduction favors goods with highly elastic demand.

4. IMPOSITION OF SALES TAXES. Government planners should exercise prudence in taxing goods
and services. Otherwise, instead of getting more money from the people, they get less. It is not
advisable to increase taxes on goods with high elastic demand. A tax is an additional price.

SUMMARY
Individual demand depends on the incomes of buyers and the prices of goods and services. They
can buy more if they have higher incomes and/or if the prices of goods are lower.