Market Demand and Elasticity

A market-demand schedule and curve are derived by horizontally adding together all of the individual consumer- demand schedules and curves in a market that is clearly defined on the basis of both product and geography.

Shifts in market-demand curves occur for the same reasons that cause individual consumer demand curves to shift. These reasons are changes in preferences, changes in income, and changes in prices of related goods and services.) In addition, market- demand curves may shift because of changes in the number of consumers that are included in the market and the distribution of income among the consumers.

Elasticity is a concept used to describe the responsiveness of one variable to a change in another variable. The changes are measured in percentages, and not in absolute numbers. This means that elasticity is independent of the unit of measure that is used.

Price elasticity of demand measures the percentage change in the quantity demanded of a product in response to a percentage change in the price of that product.

There are five categories of elasticity. Demand is elastic when in absolute values the percentage change in the quantity demanded is greater than the percentage change in the price that led to it Demand is inelastic when in absolute values the percentage change in the quantity demanded is less than the percentage change in the price that caused it. Demand is unitary elastic when in absolute values the percentage response in the quantity demanded is exactly equal to the percentage change in price that generated it. Demand is perfectly inelastic when a price change causes no quantity response at all. Demand is infinitely elastic when a price change causes an infinite response in the quantity demanded.

The price elasticity of demand of a product depends upon: (a) whether there are good substitutes available for it, (b) the proportion of consumer incomes spent on it, (c) whether the product is a luxury or a necessity, and (d) the amount of time that consumers have to adjust to the price change.

Whether a firm's total revenue from sales of a product will increase, decrease, or remain the same when the price of the product changes will depend upon the price elasticity of demand for that product.

Cross elasticity of demanded relates the percentage change in the quantity demanded for a product to the percentage change in the price of another product. It is positive for substitute products and negative for complements.

Income elasticity of demand relates the percentage change in the quantity demanded for a product to the percentage change in consumer in come. It is positive for normal products and negative for inferior products.