Definition of 'Demand Elasticity'

In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. Demand elasticity is important because it helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors. A firm grasp of demand elasticity helps to guide firms toward more optimal competitive behavior. Elasticities greater than one are called "elastic," elasticities less than one are

"inelastic," and elasticities equal to one are "unit elastic."

Investopedia explains 'Demand Elasticity'

Demand elasticity is a measure of how much the quantity demanded will change if another factor changes. One example is the price elasticity of demand; this measures how the quantity demanded changes with price. This is important for setting prices so as to maximize profit.

When price elasticity of demand is elastic, the firm should lower prices, since it will result in a big uptick in demand, increasing your total revenue. When price elasticity of demand is inelastic, you should increase prices because there will be only a small decrease in demand, and again, total revenue will increase. When price elasticity of demand is unit elastic, changing the price will not change total revenue, since price and quantity will generally change in lock step with each other.

Goods

Different Types of Goods – Inferior, Normal, Luxury

BY TEJVAN PETTINGER ON OCTOBER 20, 2011 IN ECONOMICS

A list of different types of economic goods.

Income Elasticity of Demand and types of GoodsIncome elasticity of demand measures the responsiveness of demand to a

change in income.

Definition Inferior Good: An inferior good means an increase in income

causes a fall in demand. It has a negative YED. An example, of an inferior good

is Tesco value bread. When your income rises you buy less Tesco value bread

and more high quality, organic bread.

Definition Normal Good. This means an increase in income causes an

increase in demand. It has a positive YED. Note a normal good can be income

elastic or income inelastic.

Definition Luxury Good. A luxury good means an increase in income

causes a bigger % increase in demand. It means that the YED is greater than

one. For example, high Definition TV’s would be luxury. When income rises,

people spend a higher % of their income on the luxury good. (Note: a luxury good

is also a normal good, but a normal good isn’t necessarily a luxury good)

Other Types of Goods Complementary Goods. Goods which are used together, e.g. TV and

DVD player. see: Complementary goods

Substitute Goods. Goods which are alternatives, e.g. Pepsi and coca-

cola. SeeSubstitute goods.

Giffen Good. A rare type of good, where an increase in price causes an

increase in demand. The reason is that the income effect of a rise in the price

causes you to buy more of this cheap good because you can’t afford more

expensive goods. For example, if the price of wheat rises, a poor peasant may

not be able to afford meat any more, so has to buy more wheat. See: Giffen

goods

Veblen / Snob Good. A good where an increase in price encourages

people to buy more of it. This is because they think more expensive goods are

better. See:Veblen good

Market Failure Public Goods – goods with characteristics of non-rivalry and non-

excludability, e.g. national defense. See: Public goods

Merit Goods. Goods which people may underestimate benefits of. Also

often has positive externalities, e.g. education. See: Merit goods

Demerit Goods. Goods where people may underestimate costs of

consuming it. Often has negative externalities, e.g. smoking, drugs. See: Demerit

goods

Private goods – goods which do have rivalry and excludability. The

opposite of a public good See: Private goods

Free Goods – A good with no opportunity cost, e.g. breathing air.

Normal goods

Definition of 'Normal Good'An economic term used to describe the quantity demanded for a particular good or service as a result of a change in the given level of income. A normal good is one that experiences an increase in demand as the real income of an individual or economy increases.

Another way to define a normal good is by calculating its income elasticity of demand. If this coefficient is positive and lower than 1, the good is considered to be a normal good.

Investopedia explains 'Normal Good'In most circumstances, as the income of an economy increases, there is an increase in the demand for goods and services. One example might be luxury cars; as the income level increases, more people buy or demand these cars. 

However, when income rises, demand for some goods and services may be negatively affected. For example, as the income level increases,

fewer people might use the public transportation system. In this case, the bus or train would be considered an inferior good or service because its demand has gone down.

DefinitionGood for which demand (consumption) increases as consumer income rises, but at a rate slower than the rate of increase in income. Defined also as a good for which the income elasticity of demand is positive but less than one. Also called necessary good, it is the opposite of inferior good.

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What is an example of a normal good?In economics, a normal good is one where an increase in income levels causes an increase in demand (and vice versa) despite the price of the good remaining the same. One such example would be movie tickets: people see more movies when they ...  Read More »  Source: http://wiki.answers.com/Q/What_is_an_example_of_a_normal_goodWhat is a Normal Good?A normal good is a type of good that reflects income increases or decreases. If income increases then a normal good will increase as well. Decreased normal goods will follow a decrease in income.Read More » Source: http://answers.ask.com/Business/Finance/what_is_a_normal_goodWhere to Find Good Examples of Sample Marketing PlansSometimes, the best way to wrap your head around your own marketing plan project is to look at sample marketing plans. Marketing plan development is not one-size-fits all, as you will see when you look at a few sites that offer inspiration:...  Read More »  

inferior goods

Definition of 'Inferior Good'A type of good for which demand declines as the level of income or real GDP in the economy increases. This occurs when a good has more costly substitutes that see an increase in demand as the society's economy improves. An inferior good is the opposite of a normal good, which experiences an increase in demand along with increases in the

income level.

Investopedia explains 'Inferior Good'Inferior goods can be viewed as anything a consumer would demand less of if they had a higher level of real income. An example of an inferior good is public transportation. When consumers have less wealth, they may forgo using their own forms of private transportation in order to cut down costs (car insurance, gas and other car upkeep costs) and instead opt to use a less expensive form of transportation (bus pass).

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What It Is:

An inferior good is a product for which demand goes down as income goes up.

How It Works/Example:

As opposed to demand for "normal goods," which goes up as income increases, demand for inferior goods goes down as income increases.  Consumers of inferior goods "trade up" to higher priced goods as soon as they can afford it. 

Transportation provides a good example. When income is low, it makes sense to ride the bus. But as income increases, people stop riding the bus and start buying cars. It's acceptable to most people to ride the bus when they can't afford a car. But as soon as they can afford one, they buy a car and stop riding the bus. Bus riding declines as income increases.

Rice, potatoes and instant noodles are other examples of inferior goods.

Why It Matters:

As countries increase GDP, their populations eschew inferior goods for normal goods. This is playing out in real time in places like China and India as millions of people leave a

subsistence lifestyle and move into the middle class. [See more examples of the changes happening in China and India: 10 Facts About China You Won't Believe (But You Should) and What You Didn't Know About Asia's Next Powerhouse]

Inferior goods are not the same worldwide. Fast food can be considered an inferior good in many western countries, while emerging economies consider it a normal good as they trade up from rice, potatoes, etc.

luxury goods

erm   luxury good  Definition : In general, a good (or service) that is not essential but

makes like more enjoyable. Luxury goods are often more expensive and primarily

purchased by people with more wealth and income. Using more precise, technical

language, a luxury good exists if the income elasticity of demand is positive and

greater than one. In other words, as people receive more income, they devote an

increasingly larger share of income to the purchase of luxury goods.

 

There are many different definitions for what constitutes a luxury good. Some economists define it as any item where demand is primarily influenced by income or wealth. Others consider a luxury good to be any item that is optional as opposed to necessary, or items well above the standard of necessity. Several other factors may influence whether a specific object may be considered a luxury good, including brand name association, availability, price, and socio-economic or cultural status.The economic definition of a luxury good is based more on factors of affordability compared to income rather than cultural status or need vs. want criteria. In this initial definition, a good is considered a luxury when a person must have a certain income or wealth level in order to feasibly purchase it. Additionally, items that see an increased demand based solely on increasing income are also economically considered luxury goods. In some cases, a luxurygood or service, such as a country club membership, may not even be available to the general public, reserved instead for those with proven wealth.AdChoices

DefinitionProducts which are not necessary but which tend to make life more pleasant for

the consumer. In contrast with necessity goods, luxury goods are typically more

costly and are often bought by individuals that have a higher disposable

income or greater accumulated wealth than the average.

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complements

Definition of 'Complement'A good or service that is used in conjunction with another good or service. Usually, the complementary good has little to no value when consumed alone but, when combined with another good or service, it adds to the overall value of the offering. Also, good tends to have more value when paired with a complement than it does by itself.

Investopedia explains 'Complement'A product can be considered a complement when it shares a beneficial relationship with another product offering. In an economic sense, when the price of a good rises, the demand for its complement will fall because consumers don't want to use the complement alone.  

For example, if the price of hot dogs rises so much that people stop consuming them, this will also cause a decrease in demand for hot dog buns. Because the price of hot dogs has an inverse relationship to the demand for hot dog

buns, we call them complementary products.

Substitutes and Complements: 

The demand for a good is influenced by the presence or absence of substitutes and complements. The prices of substitutes and complements are among the determinants of demand, and influence how much of a good people buy. A substitute is something that can be used instead of a particular good or service. For example, beef can be substituted for chicken. If the price of chicken increases relative to the price of beef, people will buy more beef.

Goods that are substitutes satisfy the same set of goals or preferences. The more substitutes there are and the less difference there is between the substitutes, the more sensitive the demand for a good will lead to changes in price. In other words, it is the presence of substitutes that determines whether the demand for a good will be elastic or inelastic. With substitute goods such as brands of cereal or washing powder, an increase in the price of one good will lead to an increase in demand for its substitute(or rival). Therefore the cross price elasticity for two substitutes will be positive.

Complements are goods which are used in combination with one another. Peanut butter and jelly are complementary items. If the price of peanut butter goes up, people will buy less peanut butter and less jelly because peanut butter and jelly are typically purchased together. Cheese and butter are complements to bread, and if their price falls, the demand for bread may increase. With goods complementary goods such as DVD players and DVD videos, when there is a decrease in the price of DVD players, there will be an increase in the demand for DVD players bought, leading to an increase in market demand for DVD videos. The cross price elasticity of demand for two complements is negative.

Term   complement  Definition : Two goods that "go together," either in consumption

or production. In terms of demand, a complement-in-consumption is one of two

goods that are consumed together such that an increase in the price of one good

leads to a decrease in demand and a leftward shift in the demand curve for the other

good. If the demand of good 1 decreases as the price of good 2 increases, the goods

are complements-in-consumption. In terms of supply, a complement-in-production is

one of two goods that are produced jointly using the same resources, such that an

increase in the price of one good leads to an increase in supply and a rightward shift

in the supply curve for the other good. If the supply of good 1 increases as the price

of good 2 increases, the goods are complements-in-production.

 

DVDs and VHS are substitutes since with the decrease in price of DVDs we are leaving out some consumption of VHS and increasing more of DVDs , following the Law of Demand( Price and demand are negatively related to each other) .

DVDs and popcorn are complementary goods since with fall in price of DVDs we have increased the consumption of both popcorn and DVDs.

further explanation LET THERE BE TWO GOODS X & Y..WITH PRICES AS Px and Py, then,

Substitutes: Px is positively related to quantity of y.ie with increase in price of tea , quantity of coffee will increase as they r substitutes to each other.

Complementary : Px and quantity of Y are negatively related.e.g if a price of car is increasing then the quantity demanded of fuel will be decreasing.

hope this solves the purpose.

Complements & Substitutes in EconomicsBy Tasos Vossos, eHow Contributor

Complements and substitutes have an effect on prices.

The world of economics is like a spider web: Every product has its place on the market, serving a particular need, but many of them cannot be used unless they are combined with another product we already own. You don't buy gasoline without owning a car, for example. In addition, in a free market environment, multiple products for the same purpose

compete to enter the consumer's basket. Economics experts have codified these facts, using the terms "complements" and "substitutes."

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Difference Between Complementary or Substitute in Economics

Substitutes in Economics

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1. Complementso When you buy a printer, you are aware that at some point

you will need to replace its ink. Likewise, you buy that ink only when you need to refill your printer. These two goods--and the numerous similarly linked products in the market--are called complementary; demand for one automatically increases demand for the other. If you created a line graph showing demand for Product A, you would see that Product B would follow suit. For instance, the demand for gasoline increased in the United States--and generally in the world--once cars became a mainstream commodity. Gasoline and cars are complements.

Why Complements Existo There are two main reasons for complements' emergence on

the market. The first one is objective: Cars cannot hold an unlimited amount of gas, and printers cannot produce their own ink. Their limited capacity forces you to refill them, buying the complementary product. The other reason is the companies profit: For instance, the subscriber identity module cards, or SIM cards, used in cell phones can hold an unlimited amount of credit. You could just buy the device and worry no more. But if cell phone calls were free and you payed only for the SIM card, telecommunications providers would go bankrupt.

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Substitutes

o On the contrary, when demand for Product A causes a decline for Product B, they are what the economic theory calls substitutes: similar products that serve the same need, hence the consumer only needs one of them. Sprite and 7UP are substitutes; you buy either one of them if you want that type of beverage. Substitutes are ubiquitous in the market; in fact, they are the stable of the free market's fierce competition.

Substitutes' Impacto Substitutes exist thanks to capitalism's basic value of

competition: Having more than one product gives consumers the freedom to choose, and competition between them will increase quality and drop prices. Indeed, if there were only one product for each need in a free-market economy, manufacturers could set any price and know consumers would still buy it.

As for quality, a simple example is the market for smartphones: The competition is fierce as Blackberry and Apple fight to reign over this emerging market, constantly improving their devices to lure technology-savvy consumers.

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Substitute n economics

Definition of 'Substitute'A product or service that satisfies the need of a consumer that another product or service fulfills. A substitute can be perfect or imperfect depending on whether the substitute completely or partially satisfies the consumer. A consumer might consider Pepsi to be a perfect substitute for Coke, or Land O’Lakes butter to be a perfect substitute for Kerrygold Irish Butter. However, if a consumer sees a difference in these brands, he may see Pepsi and Land O’Lakes as imperfect substitutes, even if economists might consider

them perfect substitutes.

Investopedia explains 'Substitute'For a product to be a substitute of another good, it must share a particular relationship with that good. When a good's price increases, the demand for its substitute will increase because consumers will go looking for a cheaper alternative. Conversely, when a good's price decreases, the demand for its substitute will decrease. For example, margarine is a substitute for butter because a consumer can meet similar needs by using margarine. So, when the price of butter rises, the demand for margarine will likely increase.

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What Are Substitute Products in Economics?By Dan Taylor, eHow Contributor

Different brands of the same type of drug are good examples of substitute products.

A substitute product or good is an important term in economic theory. The term refers to a good or product with a positive cross-elasticity of demand, in economics parlance. The term is used by business and economic theorists to make sense of demand and how it affects the marketplace.

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Milk Substitute Products

Complements & Substitutes in Economics

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1. Definitiono A substitute product, also known as a substitute good, is a

good whose demand increases when the price of a similar good increases. Conversely the demand for the good decreases when the price

of the other good decreases. In other words, an increase in the price of product A will cause its users to decide to switch to product B as a substitute due to its lower price and similar benefits. Substitute products are bound together, in that customers can trade one good for another if they see fit.

Exampleso A person who wears eyeglasses has a number of substitute

goods he can consider, including contact lens and laser eye surgery, all of which fix a common problem (poor eyesight) with each having their own drawbacks and benefits. A person may also consider artificial sweeteners as an alternative to sugar. You can also find a lot of substitute product choices in the area of medicine, as many companies make variations of the same product, such as aspirin.

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Concept of elasticity

ElasticityThe Concept of Elasticity:Subheading

Introduction

Elasticity is a measure that economists use to examine the effects of price and income on demand and supply. It can be defined as a measure of responsiveness where it equals percent change in quantity divided by percent change in the variable that caused the quantity to change.   Economists frequently measure elasticity because they want to compare markets such as apples to oranges and it does not matter how price or quantity is measured, thus elasticity is a unit-free measurement. It allows economists to quantify the differences among markets without standardizing units of measurement.

There are various types of elasticity, including demand elasticity and supply elasticity. Demand elasticity is the degree to which a change in price effects changes in demand and supply elasticity is when supplies of an item go up the price comes down and vice versa if price goes up supply goes down. Within each type of elasticity

The concept of Price Elasticity of Demand helps companies maximise their profit and decide whether a particular market can be profitable. 

If a company's product has a high elasticity of demand, the more the price goes up, the fewer consumers will buy. 

Sometimes, the relationship of price and demand is complicated:  If consumers (and this includes businesses) feel they can't afford a price rise, they will

try to economise. ** They will cut out unnecessary journeys, they will turn down the heating in their

home. This is "Income Price Elasticity of Demand". They may try to find an alternative product to oil. That may be using public

transport or a bicycle instead of cars, telecommuting or teleconferencing instead of travelling. In the longer term, it could involve buying an electric car or fitting solar panels to their house. This is "Cross Price Elasticity of Demand". 

If consumers don't feel they have any alternative, they will use the same amount of oil whatever happens to the price Plastics manufacturers can't make plastic without oil (at least with today's technology), bus companies can't run their buses (in the short term) without oil. So for them, there is "price inelasticity of demand.You've seen that there is a difference between short an long term. If consumers (or whole industries or governments) invest in different technologies, that particular demand for oil will reduce for a long time or for ever. 

So, how does it affect companies? 

Consumers in the highlands of Scotland probably have few public transport alternatives, may have to travel further to work and shops, probably have less choice of petrol station; and the price will be less elastic; and that's one of the reasons petrol prices are much higher than in big cities where there are more options. But suppose a petrol station hikes its prices too much: people may feel they can't afford to live there any more and move; or another petrol station may open; or a community bus service may be started; and the vendor may suffer in the long term. 

Hotels will charge more during school holidays because the fixed holidays together with limited supply of holiday accommodation, flights, etc. make the prices inelasitic.

Transport companies may alter their fares according to the price elasticity for different consumer groups. For example, they may have higher walk-on fares because consumers who arrive at a ferry terminal, airport or train station probably have a high need and few alternatives; they may have higher fares on commuter routes in mornings and evenings because commuters are less price-elastic than tourists who may decide to take bus or stay at home rather than pay a high fare.

If a company finds input costs are volotile in a price elastic marketplace, they may decide not to invest in a project, to move or close their business, or alter their product range. For example, Japan's Kansai region consumers are much more "price elastic" to tuna sashimi than Tokyo region consumers; so shops will not stock the best quality tuna sashimi in Osaka because consumers will choose a cheaper alternative instead.There are certain products that are "inverse price elastic" - where consumers are more likely to buy if the price is high (perhaps because it gives them a safe feeling about quality or because they want to impress their friends with the price of the product. A decorator may get less business charging half price in a market where consumers feel a more expensive decorator would do a better job. 

Following from this, companies may also find they have to use price elasticity realities for marketing reasons. Comapnies who exploit this situation will probably have regular and massive sales. For example, shops selling trainers (sneekers) now realise that the market is inverse-elastic unless consumers are happy they are buying a quality product, but will buy at the lowest possible price if they feel it's discounted. 

Companies may try to make manufacture inverse price elasticity (for example, by brand-builling): in some markets, people will pay more for a brand which makes them feel safe or confident.

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