When a company evaluates the demand elasticity of a product, they are seeing how much the demand of a product will change when another factor changes. One of the most common forms of demand elasticity is the price elasticity of a product. This is the measure of how much the amount of the product is demanded once the price has been increased.

When demand elasticity is evaluated, there are two ways that a product can be identified. The first way is identifying the product as being inelastic. A product that has an elasticity of one is known as unit elastic, but if the product has an elasticity that is greater than one it is simply known as being elastic. On the occasion that a product has an elasticity that is less than one it is called inelastic.

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## Types of Elasticity

In order to fully grasp the different ways that demand for a product can change, there are different types of elasticity. Most commonly, people observe four key types of elasticity in order to determine what the demand for a product may be and how that demand can change. These five types of elasticity are price, income, cross, and advertisement. All of these factors can have an impact on the demand elasticity of a product, and they are evaluated heavily in order to set what the price of the product may be.

Knowing what the different types of elasticity demand are helps a company make strategies for their products. It’s a valuable part of economic decision making, and it should be studied closely. The Udemy course Strategic Economic Decision Making explores this and other things that should be learned to help a person come up with the best decisions to help maximize the profits for their business.

## Price Elasticity of Demand

This form of elasticity of demand is the most commonly evaluated. The price of elasticity of demand, as mentioned before, is the way that people respond to the change in price of a product. In order to determine the price elasticity of a product there is a formula that is generally followed.

Price Elasticity of Demand is equal to the percentage in the quantity demanded times the percentage change of the price.

An example would be dropping the price of a product from \$100 per unit to \$90 per unit. With the decline in the price the demand of the product rises from 100 units to 150 units.

In order to evaluate whether or not the product is doing more successful now that the price has been changed, the numbers are plugged into the formula. First to determine the change percentage in quantity demand, you will have to subtract the number of units demanded so 150 – 100, which equals 50. Then you will divide that by the change in price, which in this case equals out to be 10.

After you’ve done this, you will determine the percentage change in price, which you will find by dividing the original price by the demanded quantity or in this case 100 by 100.

Now you will multiply the two numbers together, which will give you an answer of 5. Since the number is higher than one, as stated before, the product will be classified as elastic.

Of all the types of elasticity of demand, price elasticity of demand is probably the most complex. There are five different types of this one form of elasticity of demand, and it helps categorize the specific elasticity of the product. Earlier you were told about the three forms of elasticity for a good, elastic, inelastic, and unit elastic, but that is just the basic classification. There’re actually five forms of elasticity for a good.

These five forms of elasticity are perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, and finally unit elastic.

Another thing to note is that price elasticity of a product has several factors to consider when changing the price of a product. These factors involve the nature of the product, how readily available it is, the number of uses a consumer can get from it on average, how durable it may be, and the consumer income in regards to the price of the product.

## Income Elasticity of Demand

The income elasticity of demand is similar to the price elasticity, but instead of the product’s demand being changed by the price it is changed by the change in income of the people who generally purchase the product. For example, if the income of a group of people increased by 20% and the demand for the product increased by 40%, then the income elasticity of the product would equal 2, which again would make the product elastic.

## Cross Elasticity of Demand

Cross elasticity of demand is the situation where the demand of a product is measured by the change in price of another good. For example, say that the price of the Coca Cola soft drink were to increase by 10%, but in response the demand of Pepsi soft drinks were to increase as well by 20%. This would be a form of cross elasticity.

Many companies use cross elasticity to sell products together as a bundle, such as reducing the cost of cereal, but in turn increasing the demand for milk. Using cross elasticity can be advantageous to companies working together and those that are in direct competition of each other.

This form of elasticity can also have an effect on the supply chain strategy of a company if they want to remove excess supply from their inventory, but without directly changing the price of that product.

Although not nearly as common as the other forms of elasticity, advertisement elasticity is used to help determine the change in demand of a product after advertisements.

Just like other types of demand elasticity, advertisement elasticity has other factors that can influence it. One such factor is the time between the advertisement and the demand of the product, which can fluctuate greatly. There’s also the influence of whether or not the product is something new or if the product has already been in the market and is simply expanding. One of biggest influences though is the other factors outside of advertisements, such as what the current trends may be, the price of the product, etc.

Advertising can greatly improve the demand of a product or it can have no effect on its sells at all. Marketing is a key aspect for any company that wants to sell its product. If you’re interested in seeing how marketing can affect your company, check out the Marketing Udemy course. It gives you the basics of marketing and shows you the ways that it can either help or hurt business.

## The Importance of Elasticity of Demand

The most important thing that Elasticity of Demand does is help a business determine how much a product should cost and how much of a supply they should have for it. This helps the business maximize their profits. Elasticity of Demand is one of the basic concepts of economics. If you really want to learn about it and how it is used in the economy regularly, try the Udemy course Economics without Boundaries.

Page Last Updated: February 2020

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