Vasilyeva E.V. Economic theory Income elasticity of demand

29. The amount of demand. The law of demand The quantity demanded is the quantity of goods that buyers are ready (i.e., want, can) buy at a given price during a certain period: a day, a week, etc. The quantity demanded is inversely related to the price: the higher the price

19. Income elasticity of demand Tool "A person's success is not measured by how high he climbed, but by how high he jumped when he hit the bottom," said General George Patton, thereby emphasizing the elasticity that manifests itself in life,

51. Price Elasticity of Demand (Marshall) Instrument In the Malay Peninsula, when asked about the best time to harvest durian, a fruit “with a hellish smell but a divine taste”, the answer is: “When its fruits fall from a branch, men’s sarongs rise up.”

Price elasticity of demand

Income elasticity of demand

Supply elasticity

Elasticity of supply and demand

In the previous chapter it was noted that the development of a particular market situation depends on the parameters of the supply and demand functions. One of the most important parameters is the elasticity of the function.

How does a change in the price of a product affect supply and demand, sales volume? If the price of one good changes, how will the demand for the other good be affected? How will an increase in consumer income affect the demand for a product?

How to quantify these influences? The study of the proposed topic will help answer these questions.

In the future, the concept of elasticity will be used in the analysis of many other problems studied in the courses "Economic Theory", "Microeconomics", "Macroeconomics".

Price elasticity of demand

Elasticity is a measure of the response of one variable to a change in another. If variable X is changed by a change in Y, then the elasticity of X with respect to Y is equal to the percentage change in X relative to the percentage change in Y. An important point is the measurement of the relative change in variables, since it is impossible to compare the absolute changes in indicators expressed in disparate units. If X is measured in rubles, and Y is in tons, then a change in X by 1 thousand rubles. regarding the change in Y by 10 tons, it will say little. This example can also be represented as a change in X by 1 thousand rubles. relative to the change in Y by 10 thousand kg. Expressing changes in variables as percentages (or fractions) allows these changes to be compared.

The general formula of elasticity (E):

The concept of elasticity is used to characterize the functions of supply and demand. In this case, the effective (dependent) indicator is demand (or supply), and the factorial (influencing) indicator is the indicator against which we measure elasticity. The most commonly used measure of price elasticity of demand.

Price elasticity of demand is the relative change in quantity demanded for a good divided by the relative change in the price of that good. It shows how quantitatively (by how many percent, or by what share) the quantity demanded for a good will change if the price of the good changes by one percent (one share).

the quantity demanded was equal to 10 units. goods, and became 8 units, then the percentage change can be calculated as (10 - 8) / 10 \u003d 0.2 (or 20%), or as (10 - 8) / 8 \u003d 0.25 (or 25%). It is not so important with which of the values ​​to correlate the changes, the main thing is that for both indicators (demand and price) the same method is used (or both indicators are correlated with the initial or final value). Flaw this method- depending on the result of calculations, whether the change in the indicator corresponds to its initial or final value. The formula for calculating the price elasticity of demand in accordance with the described method will be as follows:

In order to eliminate the influence of the choice of the initial or final values ​​of the demand and price indicators on the value of the price elasticity of demand, you can apply the midpoint formula, which involves determining the arithmetic average of the initial and final values. For the example above: (10 - 8) / [ (10 + 8) / 2] = = 0.2 (2) (or approximately 22%). The coefficient of price elasticity of demand using the midpoint formula will look like:

Let's use the hypothetical example of the dependence of demand on the price in the chocolate market from the previous chapter and calculate the price elasticity of demand with respect to price (Table 6.1 and Fig. 6.1).

The elasticity of demand according to formula (6.3) in the interval between the first and second observations of the chocolate market will be equal to:

Note that the price elasticity of demand is negative. This is natural if we recall the inverse relationship between the quantity demanded and the price (hence the negative slope of the demand curve in Figure 6.1). Since the law of demand is satisfied for all normal goods, the value of the price elasticity of demand for them will always be negative. For convenience, the minus sign is usually abstracted by taking the value of the coefficient modulo.

The value of the elasticity coefficient obtained above, equal to |b|, is interpreted as follows: if the price changes by 1%, the quantity demanded will change by 6%, i.e. relatively more than the price.

The value of the coefficient of price elasticity of demand modulo can vary from zero to infinity. For analytical purposes, it is convenient to distinguish three groups of values ​​of this coefficient: from zero to one, equal to one and greater than one.

When the coefficient of elasticity takes values ​​from zero to one (E0 / P & (0;!)), one speaks of inelastic demand for the price of the product. In this situation, the quantity demanded changes to a lesser extent than the price level, i.e. demand is less responsive to price. In the extreme case, when EO/P = 0, we are dealing with a perfectly inelastic demand for the price of the product. At the same time, the quantity demanded does not change at all when the price changes. Food staples are examples of goods with inelastic demand. If bread doubles in price, consumers will not buy it twice as often, and vice versa, if bread becomes twice cheaper, they will not eat it twice as much. But water in the desert will be bought with any money that the sufferer has at his disposal, and this is an example of a perfectly inelastic demand.

When the elasticity coefficient takes on a value equal to one, we speak of demand with unit elasticity. In this case, the quantity demanded changes strictly in proportion to the price of the goods.

Finally, if the elasticity coefficient takes on values ​​greater than one (E0 / P e (1; oo)), there is an elastic demand for price. The amount of demand changes to a greater extent than the price level, i.e. demand is more responsive to price. In the extreme case, when the coefficient of elasticity tends to infinity, we speak of perfectly elastic demand with respect to price. Even a minimal increase in the price of a good threatens to drop the quantity demanded to zero, and a minimal price decrease threatens to increase the quantity demanded infinitely. An example of markets with elastic demand is to be found in the markets for non-essential commodities and durable goods.

Figure 6.2 shows graphs of perfectly elastic and perfectly inelastic demand.

Let's continue our analysis of the chocolate market (see Figure 6.1).

Let us calculate the price elasticity of demand for the segment where the price decreases from 19 to 14 den. units, and the quantity demanded increases from 15 to 20 units:

As you can see, on this segment of the demand curve, the elasticity is slightly less than unity, i.e. quantity demanded increases more slowly than the price level decreases.

Let us now calculate the elasticity on the extreme right segment of the curve, where the price decreases from 7 to 5 den. units, and the value of demand grows from 30 to 35 units. goods:

On this segment, demand is inelastic: when the price changes by 1%, its value changes by less than 0.5%. Thus, the further to the right we move along the demand curve, the less elastic it becomes. At the same time, the slope of the demand curve should not be identified with its elasticity, since the slope of the curve describes only those parts of the equation that show a change in the price and quantity indicators (D. O, AR), and there are other factors in the formula - O and P. In general on the graph of the demand function, there are sections with an elasticity coefficient greater than one, less than one, and unit elasticity. On the upper left section of the curve, the modulo elasticity coefficient is greater than one, on the lower right section it is less than one, and in the middle of the demand curve there will be a section with unit elasticity (Fig. 6.3).

In order to geometrically determine the elasticity of demand at any point on the graph represented by a straight line, it is necessary to compare the lengths of the straight line segments from the point of interest to us (for example, point X in Fig. 6.3) to the intersection with the coordinate axes. Let us extend the demand curve with dotted lines to the points of its intersection with the quantity and price axes (points B and A). The elasticity of demand at point X can be calculated by dividing the length of the XB segment by the length of the XA segment. The second option for calculating elasticity at point X is the ratio of the lengths of the segments BC and OS.

Of course, geometrically, the point with unit elasticity is in the middle of the demand curve only on graphs of functions expressed by straight lines. For non-linear functions, the slope of the curve is constantly changing, so to determine the elasticity in a geometric way the rules are somewhat different. Figure 6.4 shows a curved graph of the demand function. To determine the elasticity of demand at point X, it is necessary to draw a tangent to the curve at this point, then measure the segments of the tangent XB and XA and divide XB by XA (or CB by OS). It is clear that at each point of the curve the tangent will have a different slope and the segments will be of different lengths.

For a demand function expressed by a curve, the elasticity can be constant at each point. Such a property is inherent in power functions of the type & = a P ~ b, while the demand curve has a hyperbolic shape and the elasticity of the curve at each point is equal to b.

It is necessary to distinguish between the concepts of arc elasticity and point elasticity. Calculations based on formula (6.3) are associated with the calculation of arc elasticity, when the value of the elasticity coefficient on a segment (arc) of the demand curve is determined. This is a relatively simple method in terms of mathematical calculations. However, since the elasticity of demand changes throughout the segment, only the average value is calculated over the entire segment, while at each individual point on the demand curve, the elasticity of the function is different. To determine the point elasticity, a formula similar to formula (6.1) is used:

Thus, in order to calculate the point elasticity of demand, it is necessary to derive a mathematical function of the dependence of the quantity demanded on the price, take the derivative of this function, calculate its parameters at a particular point and multiply by the ratio of price and quantity demanded at a given point.

Let us give a hypothetical example of calculating point elasticity. Let's assume that the function of dependence of the quantity demanded on the price looks like B = 200/Р (that is, the function is non-linear) and the graph has the form of a hyperbola (Fig. 6.5). Suppose we need to calculate the elasticity of demand at point X, at which the price of a good is 10 den. units, and the magnitude of the demand, respectively, is 200/10 = 20 units. Let us take the first derivative of the quantity demanded with respect to the price cYu / aP = (200/P) = - 200/P2. At Р = 10 we have (1В / с1Р = - 2. We substitute the value in the formula (6.4): Е0 / Р = - 2 10/20 = - 1. The demand function at this point has a unit elasticity.

To calculate the point elasticity coefficient, the geometric method described above can be applied, i.e. draw a tangent to point X and divide the length of the tangent segment below point X by the length of the tangent segment above point X (see Fig.6.5). The segments are equal, which confirms the algebraic calculation.

Consider the factors affecting the elasticity of demand. First of all, the availability of substitute goods affects the price elasticity of demand. Obviously, the easier it is to replace a given product with some other that satisfies the same (or similar) human need, the more sensitively the consumer will react to a change in the price of the product. Why pay more for a product that goes up in price when you can buy a cheaper analogue? The demand for water is less elastic because it is not easy to find a substitute for water; demand for cars of any brand is more elastic, since they can be replaced by cars of competing firms. Usually, the more intense the competition between sellers in the market of a product, the more elastic the demand for this product.

The share of the cost of purchasing this product in the total amount of consumer spending is another factor in the elasticity of demand. The greater the share of total spending is the cost of a given product, the faster the consumer's reaction to a change in the price of the product. Demand ballpoint pens less elastic, since pens are cheap and their rise in price even several times will not significantly affect the consumer's budget; demand for cars is more elastic due to their high cost.

The time factor also affects the elasticity of demand. The more time the consumer has to adjust to the new price of the good, the greater the price elasticity of demand is observed. Demand is more elastic in the long run and less elastic in the short run.

Cross price elasticity of demand

Demand for a product changes under the influence of price changes in the markets of substitute goods and complement goods. Quantitatively, this dependence is characterized by the coefficient of cross-price elasticity of demand, which shows how the quantity demanded for this product will change when the price of another product changes. The formula for calculating the coefficient of cross elasticity of demand for product A, depending on the change in the price of product B, is as follows:

The calculation of the coefficient of cross-price elasticity of demand allows you to answer by how many percent the demand for good A will change if the price of good B changes by one percent. The calculation of the cross elasticity coefficient makes sense, first of all, for substitute and complementary goods, since for weakly interconnected goods the value of the coefficient will be close to zero.

Consider the example of the chocolate market. Suppose we have also made observations on the halva market (chocolate substitute product) and the coffee market (chocolate complement product). Prices for halvah and coffee changed, as a result, the volume of demand for chocolate changed (assuming all other factors are unchanged).

Applying formula (6.6), we calculate the values ​​of the coefficients of cross-price elasticity of demand. For example, when the price of halva is reduced from 20 to 18 den. units demand for chocolate fell from 40 to 35 units. The cross elasticity coefficient is equal to:

Thus, with a decrease in the price of halva by 1%, the demand for chocolate in this price range decreases by 1.27%, i.e. is elastic relative to the price of halvah.

Similarly, we calculate the cross elasticity of demand for chocolate with respect to the price of coffee if all market parameters remain unchanged and the price of coffee falls from 100 to 90 denier. unit:

Thus, with a 1% decrease in the price of coffee, the demand for chocolate increases by 0.9%, i.e. The demand for chocolate is inelastic with respect to the price of coffee. So, if the coefficient of elasticity of demand for good A with respect to the price of good B is positive, we are dealing with substitute goods, and when this coefficient is negative, goods A and B are complementary. Goods are called independent if an increase in the price of one good does not affect the amount of demand for another, i.e. when the cross elasticity coefficient is zero. These provisions are true only for small price changes. If the price changes are large, then the demand for both goods will change due to the income effect. In this case, the goods may be erroneously identified as complements.

Income elasticity of demand

In the previous chapter, the dependence of demand on consumer income was considered. For normal goods, the higher the consumer's income, the higher the demand for the good. For goods of the lowest category, on the contrary, the greater the income, the less demand. However, in both cases, the quantitative measure of the relationship between income and demand will not be the same. Demand may change faster, slower, or at the same rate as consumer income, or not change at all for some goods. To determine the measure of the relationship between consumer income and demand, the coefficient of income elasticity of demand helps, showing the ratio of the relative change in the magnitude of demand for a product and the relative change in consumer income:

Accordingly, the coefficient of income elasticity of demand can be less than, greater than or equal to one in absolute value. Demand is income elastic if the amount of demand changes to a greater extent than the amount of income (E0/1 > 1). Demand is inelastic if the amount of demand changes to a lesser extent than the amount of income (E0 / [< 1). Если величина спроса никак не изменяется при изменении величины дохода, спрос является абсолютно неэластичным по доходу (. Ед // = 0). Спрос имеет единичную эластичность (Ео/1 =1), если величина спроса изменяется точно в такой же пропорции, что и доход. Спрос по доходу будет абсолютно эластичным (ЕО/Т - " со), если при малейшем изменении дохода величина спроса изменяется очень сильно.

In the previous chapter, the concept of the Engel curve was introduced as a graphical interpretation of the dependence of the quantity demanded on the income of the consumer. For normal goods, the Engel curve has a positive slope, for goods of the lowest category it has a negative slope. Income elasticity of demand is a measure of the elasticity of the Engel curve.

The income elasticity of demand depends on the characteristics of the product. For normal goods, the income elasticity of demand has a positive sign (Eo / 1 > 0), for goods of the lowest category - a negative sign (-Eu //< 0), для товаров первой необходимости спрос по доходу неэластичен (ЕО/Т < 1), для предметов роскоши - эластичен (Е0/1 > 1).

Let's continue our hypothetical example with the chocolate market. Suppose we have observed changes in the incomes of chocolate consumers and, accordingly, changes in the demand for chocolate (we assume that all other characteristics remain unchanged). The results of observations are listed in Table 6.3.

Let us calculate the income elasticity of demand for chocolate in the segment where the amount of income increases from 50 to 100 den. units, and the quantity demanded - from 1 to 5 units. chocolate:

Thus, on this segment, the demand for chocolate is elastic with respect to income, i.e. for a 1% change in income, the demand for chocolate changes by 2%. However, as income increases, the elasticity of demand for chocolate decreases from 2 to 1.15. There is a logical explanation for this: at first, chocolate is relatively expensive for the consumer, and as incomes rise, the consumer significantly increases the volume of purchases of chocolate. Gradually, the consumer is satiated (after all, he cannot eat more than 3-5 bars of chocolate per day, among other things, this is unsafe for health), and further income growth no longer stimulates the same growth in demand for the product. If we continued to observe, we could see that at very high incomes, the demand for chocolate becomes income inelastic (Eo/1< 1), а потом и вовсе перестает реагировать на изменение дохода (Еп/1 - " 0). Вид кривой Энгеля для этого случая представлен на Рис.6.6.

Ш Consider the relationship between consumers' incomes and their demand on the example of the Republic of Belarus. Table 6.4 shows data on the cash income of households in the country in different years and information on the structure of household consumption. Since prices have fluctuated significantly due to inflation and other factors, we are interested in percentage changes in real consumer incomes and changes in consumption patterns.

Supply elasticity

Instantaneous, short-term and long-term equilibrium and elasticity of supply.

A quantitative measure of the response of the magnitude of the supply of a good in response to a change in the price of a good is the price elasticity of supply. The basic formulas for calculating the coefficient of price elasticity of supply are similar to the formulas for calculating the coefficients of price elasticity of demand (6.1-6.4). Here is the formula for calculating the arc elasticity of the offer at a price:

Since there is a direct relationship between the price of a good and the quantity supplied, and the curve of dependence of quantity supplied from price has a positive (ascending) slope, the value of the price elasticity coefficient of supply will be greater than zero.

Allocate:

Elastic supply of goods (when E8 / P > 1), when the supply value changes more than the price level;

Inelastic supply (at E8/P< 1), когда величина предложения изменяется слабее, чем уровень цены;

Absolutely elastic supply (E8 / P -\u003e w), in which the value of the coefficient of price elasticity of supply tends to infinity;

Absolutely inelastic supply (E3 / P = 0), in which price changes do not lead to changes in the supply;

Unit elasticity supply (E3/P = 1) when the supply changes in the same proportion as the price of the good.

The curves of perfectly elastic (53) > inelastic supply (52) and supply with unit elasticity (I!) are shown in Fig.6.7.

Note that if the dependence of the supply on the price is expressed by a straight line, then the line emerging from the origin will have an elasticity equal to one. Only by the slope of the supply curve it is impossible to judge the elasticity of supply (as well as the elasticity of demand by the slope of the demand curve), since prices and supply quantities can be expressed in different units of measurement (pieces and thousands of pieces, hours and days). In addition, at different points, even a straight line has a different elasticity (except for the line starting from the origin). Equal elasticity can have a supply curve that starts from the origin and is a graph of a power function of the type 8 = a Pb.

Let's calculate the elasticity of chocolate supply (Table 6.5 and Fig. 6.8).

On the segment where the price changes from 5 to 7 den. units, and the supply value changes from 1 to 5 units, the price elasticity of supply will be

Thus, in this section of the supply curve, with an increase in price by 1%, the quantity supplied increases by 4%. Having calculated the elasticity of supply for other segments of the curve, we can observe a gradual decrease in elasticity as we move to the upper right section of the curve (see Figure 6.8).

The elasticity of supply at any point on the curve can also be determined from the algebraic function that describes the given curve.

For example, if the dependence of the supply on the price is expressed by the formula 5 = 10 + Р2, then in accordance with formula (6.10), the elasticity of supply at the point with coordinates Р = 2, 5 = 14 is calculated by multiplying the first derivative of the function 5 = 2Р by the ratio of supply and prices at this point:

The elasticity of supply, expressed by a straight line, can be characterized graphically by determining which of the coordinate axes the graph of the supply function intersects (Figure 6.9). If the supply curve 52 touches the vertical axis (price), then the elasticity coefficient is greater than one, and if, on the contrary, the straight line > §! touches the horizontal axis (quantity), then the supply is inelastic.

If the function of the dependence of the supply on the price is non-linear (the graph of the supply function is a curve), then in order to determine the elasticity at a certain point on the curve, it is necessary to construct a tangent to this point.

The time a manufacturer has to respond to a change in the price of a product is a major factor influencing the elasticity of supply.

Obviously, the longer the period under consideration, the more sensitive the producer's reaction to price changes, i.e. the higher the price elasticity of supply.

From these positions, several types of time intervals are distinguished, called production periods, which differ in the elasticity of supply (Fig. 6.10).

The instantaneous period is a short period of time for producers to change the amount of supply, as a result of which supply is perfectly inelastic. Even if the demand in the market turns out to be extremely strong and prices rise strongly, manufacturers will not have time to increase production (they can only sell off stocks, if any). An example of this is the sale of perishable fruits in the market: they must be sold very quickly, and if the demand is too low, sellers will reduce prices to the lowest levels in order to sell the goods. The supply curve in the instantaneous period in Figure 6.10 is the vertical 8M curve.

The short-term period is a period of time sufficient to change the intensity of the use of existing production capacities, but insufficient to increase these capacities. For example, manufacturers do not have enough time to build a new plant, but two or three shifts are enough to organize work at an old plant. In this case, the supply curve will no longer be a vertical line, since the quantity supplied increases with the price. The supply curve in the short run in Figure 6.10 is curve 55.

The long run is a period of time sufficient to change the amount of capacity utilization. The manufacturer can build new workshops and enterprises, responding in a timely manner to the growth in demand, and introduce new technologies. The long-term supply curve in Figure 6.10 is an almost horizontal line<3Ь.

Thus, the longer the time interval under study, the greater the elasticity of the supply curve for the product.

Suppose that due to the action of some non-price factor, the demand for a product has increased, the demand curve has shifted from position O ± to position P2 (see Fig. 6.10). In the instantaneous period, this will lead to a very significant increase in the equilibrium price (up to P4) WITH the same volume of output (supply at the price is absolutely inelastic). In the short term, the intensive use of existing production capacities will reduce the price to the level of P3, the equilibrium volume of production will grow to the level of F2 - In the long run, the price will come even closer to the original (but will be higher than it), the volume of production will increase to the level of f3.

The Practical Importance of Elasticity Analysis

The definition of the elasticity of demand and supply is widely used to analyze market situations, in particular, in the study of the relationship between the elasticity of demand and the income of producers. Many people are concerned about the question: if sellers increase the price of the goods, will the sales proceeds increase or decrease? On the one hand, an increase in price has a positive effect on the amount of revenue, but on the other hand, the operation of the law of demand leads to a decrease in the amount of demand with an increase in price, which negatively affects the amount of sellers' revenue. Which direction the resultant of these two forces will take depends on the elasticity of demand in a particular range of changes in price and quantity of goods.

Let's approach the problem mathematically. Sellers' revenue is the product of the price of a good and its quantity sold (or quantity demanded):

Since the magnitude of demand is a function of the value: (1) = DR.)), then the proceeds can be expressed by the formula

those. as a function of price. The function will be increasing, decreasing or constant - depending on the sign of its first derivative. The derivative of revenue is defined as follows:

The first derivative of the revenue function is the product of the quantity demanded and the amount of unit and the price elasticity of demand. The value of demand is positive, so the sign of the first derivative of revenue depends on the elasticity of demand. For \E0/P\ > 1, or E0/P< - 1 (мы помним, что эластичность спроса обычно отрицательная) первая производная функции выручки от цены имеет отрицательный знак; при \Е0/Р < 1, или ЕО/Р >- 1 it has a positive sign; at \ЕО/Р - 1, or Е0/Р = - 1, the first derivative of the revenue function is equal to zero.

In other words, if demand is elastic in this segment, then a price increase will lead to a decrease in the total revenue of sellers, and its decrease will be accompanied by an increase in revenue (Fig. 6.11).

Geometrically, revenue is the area of ​​the rectangle enclosed between the price level and the volume of sales (demand). Let us assume that initially the price level in the market was Рг, the volume of sales was equal to (^1, and the equilibrium was reached at point A (see Fig. 6.11). price to P2, the quantity demanded would rise to F2, and the equilibrium would shift to point B. At the same time, the amount of revenue, having changed, would begin to be expressed by the rectangle P2B<320, который заметно больше первого. Следовательно, сумма выручки выросла бы при снижении цены. На данном отрезке прямой спрос эластичен (в § 6.1 отмечалось, что на участках прямой, лежащих левее ее середины, функция эластична).

But imagine that demand is inelastic. In this case, when the price changes, the volume of sales changes less than the price, and the total amount of revenue changes in the same direction as the price (Fig. 6.12). When the price drops from P1 to P2, sales increase from $! up to f2, but this is not enough to cover the impact of the price reduction. The amount of revenue expressed in the areas of the corresponding rectangles.

With demand with unit elasticity, the change in prices and sales volumes does not affect the amount of revenue in any way (Fig. 6.13). In this case, the consequences of a price change are completely offset by a change in sales volume. Of course, for a demand function expressed as a straight line, the section with unit elasticity reduces to a point, but for a curve expressed by the corresponding power function, unit elasticity of demand can be observed throughout the curve.

So, with inelastic demand, the amount of sellers' revenue changes in the same direction as the price of the goods; with elastic demand, the amount of revenue changes in the opposite direction to the change in the price of the goods; with demand with unit elasticity, the amount of revenue does not change with a change in price and sales volume.

A seller seeking to maximize the amount of income from the sale of products must estimate the elasticity of demand for the goods he sells. With elastic demand, it is more profitable to lower the price, then an increase in sales will lead to an increase in revenue. If demand is inelastic, it is more profitable for the seller to increase the price, then the decrease in sales will be less significant and the amount of revenue will increase. Of course, the amount of revenue is not the only indicator of interest to the seller, in the next chapter it will be shown that profit is even more important for him.

Let us further consider the influence of the parameters of supply and demand curves on consumer and producer surpluses, as well as on the distribution of the tax burden. Recall the sales tax example from the previous chapter (see Figure 5.31).

If the demand for the taxed good is not perfectly inelastic, then the selling price of the good is increased by an amount less than the amount of the tax. The tax is distributed in some proportion between sellers and buyers. The amount of consumer and producer surplus changes. Let's take a look at what drives these changes.

How the tax burden is distributed between producers and consumers depends on the slopes of supply and demand curves. Figure 6.14 shows a relatively flat demand curve and a relatively steep supply curve.

This means that demand is more volatile than supply when the price changes. In this case, the price of the good grows much weaker than the amount of the tax, i.e. most of the tax is paid by sellers, and a smaller part by consumers.

Figure 6.15 shows the reverse situation - a relatively steep demand curve and a relatively flat supply curve. This means that supply is more volatile than demand when the price changes.

In this case, most of the tax is passed on to consumers and not to producers, since the price of the goods rises by almost the amount of the tax.

DEMAND- the solvent need of buyers for this product at a given price. Demand is characterizeddemand- the quantity of goods that buyers are willing to purchase at a given price. By the word “ready” one must understand that they have a desire (need) and an opportunity (availability of the necessary funds) to purchase goods in a given quantity.
It should be noted that demand is a potential solvent need. Its value indicates that buyers are ready to purchase such a quantity of goods. But this does not mean that transactions in such volumes will really take place - it depends on a number of economic factors. For example, manufacturers may not be able to produce such a quantity of goods.
Can be considered asindividualdemand (demand of a particular buyer), andoverall valuedemand (the demand of all buyers present in the market). In economics, it is mainly the total demand that is studied, since individual demand is highly dependent on the personal preferences of the buyer and, as a rule, does not reflect the real picture that has developed in the market. So, a particular buyer may not feel the need for any product at all (for example, a bicycle), nevertheless, there is a demand for this product in the market as a whole.
As a rule, the demand for a product is subject tolaw of demand.
GRAPH OF THE CROSS DEPENDENCE OF DEMAND ON PRICEA graph showing the relationship between the quantity demanded of one good and the price of another good. Each value of the price of one corresponds to its value of the quantity demanded for the other. This relationship can be expressed graphically ascrossed demand curveon a graph of the cross-dependence of demand on price.
Please note that although the values ​​of the independent variable are usually plotted along the abscissa, on the contrary, on the graph of the cross dependence of demand on price, it is customary to plot the price of the influencing product along the abscissa ( P A ), and along the y-axis - the quantity of the dependent product ( Q B ).
CROSS DEMAND CURVE- a continuous line on the graph of the cross-dependence of demand on the price, on which each value of the price of the goods A corresponds to a certain amount of demand for goods B .

CROSS PRICE ELASTICITY OF DEMAND(cross price elasticity of demand) - the degree of change in the quantity demanded for a product when the price of any other product changes.
It is important to note that cross elasticity is direct and does not mean that there is an equal inverse relationship. For example, lowering the price of overseas tourist travel will greatly increase the demand for travel guides. However, the opposite is not true: reducing the price of guidebooks will not significantly increase the demand for foreign travel.
The cross price elasticity of demand is characterized bycross price elasticity of demand.
CROSS-ELASTICITY COEFFICIENT OF PRICE DEMAND- a numerical indicator reflecting the degree of change in the magnitude of demand for a product or service in response to changes in the price of some other product (service). Calculated according to the formula:

where P a - product price a , Δ P a - change in the price of goods a , Q b - the magnitude of demand (number of goods) for the goods b , Δ Q b - change in demand for goods b .
Depending on the value of the coefficient E ab allocate:

• lack of cross elasticity ( E ab = 0 )
• direct cross elasticity ( E ab > 0 )
• inverse cross elasticity ( E ab < 0 )

Goods for which a change in the price of one good leads to a noticeable change in the demand for another good are calledrelated goods. Goods for which the value of cross elasticity is equal to or close to zero are calledneutral goods.
The elasticity coefficient gives an idea of ​​how sales revenue will change when the price of a product changes.
RELATED PRODUCTSGoods for which a change in the price of one good leads to a noticeable change in the demand for another good. The main groups of related goods aresubstitute goods and complementary goods.
SUBSTITUTE GOODS(substitutes) - a group of goods and services for which an increase in the price of one of them leads to a noticeable increase in demand for others, acting as substitutes, full or partial. This is because an increase in the price of one of these goods attracts buyers to its cheaper substitutes and vice versa.
Substitute goods have a direct cross elasticity, the value of which depends on how close the substitutes are. For example, chicken meat and turkey meat are closer substitutes than chicken and beef meat, so the value of the cross elasticity coefficient for them will be higher.
COMPLEMENTARY PRODUCTS(complementary goods) - goods that satisfy needs only in combination with each other, for example, cars and fuels and lubricants, mobile phones and operator services cellular communication etc. For such goods, an increase in the price of one of them leads to a marked decrease in the demand for others.
Substitute goods have an inverse cross elasticity, the value of which depends on how closely interconnected goods are, how much one product is needed to use another. For instance, mobile phone cannot be used without the services of cellular communication companies - these products are very closely related. The mobile phone is less associated with accessories for it. The absolute value of the cross elasticity coefficient in the first case will be higher.
NEUTRAL GOODS- Goods for which a change in the price of one good does not cause a noticeable demand for another. The cross elasticity coefficient for them is equal to or close to zero.
However, the complete absence of dependence can be observed only for such goods, the share of which is insignificant in the structure of consumer spending. If the share of spending on goods is high, then a change in price will affect the amount of disposable income and thus demand. Here, in turn, two cases can be distinguished. If we are talking about spending on essential goods and services, then the price of them will inversely affect the amount of disposable funds. For example, if the rent and prices for public Utilities, then consumers will have less money left for other expenses, and therefore the demand for whole line goods will decrease. When it comes to luxury goods, for example jewelry, then rising prices for them will make them unaffordable for many families. As a result, the money they were supposed to use to buy jewelry, they would rather use it for something else. In this case, you can see a small direct relationship.

Noteworthy is the cross (mutual) elasticity of demand, which expresses the degree of sensitivity of demand for a particular product to a change in the price of another product. The cross elasticity coefficient shows how many percent the demand for this product will change when the price of another product changes by 1%:

Where is the relative change in demand for product X; - relative change in the price of product Y.
The sign of the cross elasticity coefficient depends on whether the goods are interchangeable, complementary or neutral to each other. These options are discussed in Fig. 10.3.

Curve B (Exy Curve C (Exy> 0) reflects positive cross-elasticity: with an increase in the price of good Y, the volume of demand for good X increases, i.e. there is, as it were, a switch in demand from good Y to good X. In this
In this case, goods are fungible (substitutes), for example, bus and subway, sweets and cakes, coffee and tea.
Curve D (E xy \u003d 0) expresses zero or close to zero cross elasticity: a change in the price of product Y has no or very little effect on the demand for product X. Such goods are called independent, or neutral, for example, an increase in the price of hats is unlikely to affect demand for boots.
Therefore, the concept of elasticity of demand is very useful in studying the reaction of consumers under the influence of various factors. Depending on the degree of elasticity of demand, entrepreneurs can predict and determine the behavior of their enterprises.
The problem of studying demand is not only a problem of buyers and sellers, who must have sufficient information about the dynamics of demand for manufactured goods. Demand is also of interest to government agencies, primarily the tax system, since it is necessary to know how an increase or decrease in tax rates can affect a change in demand, which will ultimately affect the reduction or increase in tax revenues to the budget. In this case, we are talking about indirect taxes, or taxes that are included in the prices of goods. These are excise taxes on goods of low elastic demand (salt, matches), or goods that are considered harmful from the point of view of society (alcohol, tobacco), or value added tax. This aspect of demand elasticity is discussed below in relation to supply elasticity.

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CROSS ELASTICITY OF DEMAND FOR PRICE expresses the relative change in the volume of demand for one good when the price of another good changes, all other things being equal.

There are three types of cross price elasticity of demand:

positive;

negative;

Zero.

Positive cross price elasticity of demand refers to interchangeable goods (substitute goods). For example, butter and margarine are substitute goods, they compete in the market. An increase in the price of margarine, which makes butter cheaper in relation to the new price of margarine, causes an increase in demand for butter. As a result of an increase in the demand for oil, the demand curve for oil will shift to the right and its price will rise. The greater the interchangeability of two goods, the greater the cross price elasticity of demand.

Negative crossover price elasticity of demand refers to complementary goods (accompanying, complementary goods). These are benefits that are shared. For example, shoes and shoe polish are complementary goods. An increase in the price of shoes causes a decrease in demand for shoes, which, in turn, will reduce the demand for shoe polish. Therefore, when the cross elasticity of demand is negative, as the price of one good rises, the consumption of the other good decreases. The greater the complementarity of goods, the greater will be the absolute value of the negative cross price elasticity of demand.

Zero cross price elasticity of demand refers to goods that are neither substitutable nor complementary. This kind of cross-price elasticity of demand shows that the consumption of one good is independent of the price of another.

The values ​​of cross price elasticity of demand can vary from "plus infinity" to "minus infinity".

Cross price elasticity of demand is used in the implementation of antitrust policy. To prove that a particular firm is not a monopolist of some good, it must prove that the good produced by this firm has a positive cross elasticity of demand with respect to price compared to the good of another competing firm.

An important factor that determines the cross-price elasticity of demand is the natural characteristics of goods, their ability to replace each other in consumption. .

Knowledge of the cross price elasticity of demand can be used in planning. Assume that the price of natural gas is expected to rise, which will inevitably increase the demand for electricity, since these products are interchangeable in heating and cooking. Assume that the cross price elasticity of demand in the long run is 0.8, in which case a 10% increase in the price of natural gas would lead to an 8% increase in electricity demand.

The measure of the interchangeability of goods is expressed in the value of the indicator of cross-price elasticity of demand. If a small increase in the price of one good causes a large increase in the demand for another good, then they are close substitutes. If a small increase in the price of one good causes a large decrease in the demand for another good, then they are close complementary goods. .

CROSS-ELASTICITY COEFFICIENT OF DEMAND BY PRICE - an indicator that expresses the ratio of the percentage change in the volume of the requested good to the percentage of the price of another good. This coefficient is determined by the formula:

The coefficient of cross price elasticity of demand can be used to characterize the substitutability and complementarity of goods only with minor price changes. With large price changes, an income effect will be detected, which will cause a change in demand for both goods. For example, if the price of bread falls by half, then the consumption of not only bread, but also other goods, will probably increase. This option can be regarded as complementary benefits, which is not legitimate.

According to Western sources, the coefficient of elasticity of butter to margarine is 0.67. Based on this, when the price of butter changes, the consumer will respond with a more significant change in demand for margarine than v opposite option. Therefore, knowledge of the coefficient of cross-price elasticity of demand makes it possible for entrepreneurs who produce fungible goods to more or less correctly set the volume of output of one type of good when the price of another good is expected to change.

ELASTICITY OF SUPPLY AT PRICE - an indicator of the degree of sensitivity, the response of the proposal to a change in the price of a product. It is calculated by the formula:

The method of calculating the elasticity of supply is the same as that of the elasticity of demand, with the only difference being that the elasticity of supply is always positive because the supply curve has an "ascending" character. Therefore, there is no need to conditionally change the sign of the elasticity of supply. Positive value elasticity of supply is due to the fact that a higher price stimulates producers to increase output.

The main factor in the elasticity of supply is time, because it allows producers to respond to changes in the price of a commodity.

Allocate three time period:

-current period- the period of time during which producers cannot adapt to changes in the price level;

-short period- the period of time during which producers do not have time to fully adapt to changes in the price level;

-long period- a period of time sufficient for producers to fully adjust to price changes.

There are the following forms of supply elasticity:

-elastic supply- the quantity supplied changes by a greater percentage than the price when the elasticity is greater than one (E s > 1). This form of supply elasticity is characteristic of the long run;