- 500+ Experts Online to help you 24x7
- Guaranteed Grade or Get Money Back!
- Rated 4.8/5 Out of 5087 Reviews
Login / Sign up
Login or Sign Up With Your Email to Complete the Order ProcessGet Additional $5 Cashback on Sign Up
Login or Sign Up With Your Email to Complete the Order ProcessGet Additional $5 Cashback on Sign Up
Elasticity of demand refers to measurement of variability in quantity demanded in response to change in the price of product or services. In economical term, elastic demand is arises when the price, income or other factors affect the purchasing behaviour of customer. As the price of a commodity has an inverse relation with the demand of that product according to 'the law of demand'. This assignment is based of TESCO, a British multinational groceries and general merchandise retailer (Buer, 2016). It deals in various product categories such as food, grocery items, clothing, furniture, financial services and many more throughout the world. This report contains an explanation about the elasticity of demand and different elements of elasticity. Further it also describes about the importance of elasticity of demand in decision making process of TESCO and its practical application of this concept.
In economics, elasticity refers to measuring the reaction of demand and supply due to change in price or income level. This elasticity varies from product to product which depend upon the need and requirement of consumers (Chandra, Gruber and McKnight, 2014). Commodities that are consider as necessities of consumers, tend to be less sensitive to changing price as end users keep on buying these products despite of price increment. Following formula is used for evaluating the elasticity of demand or supply of a commodity.
Elasticity = (%change in quantity/ %change in price)
When elasticity is greater than or equal to 1, curve is consider as elastic. But in case it is less than one, curve is consider as inelastic.
Source: Types of Elasticity of Demand, 2018
Above given image shows the various types of factor in elasticity of demand which have an direct impact over the demand or supply of goods or services. Elements of elasticity are of three types, which are as follows:
Ep = (Δq/Δp) (p/q)
Where, p refers to the price and q refers to quantity of goods demanded. This formula generally provides negative value due to inverse relationship between price and quantity as per “the law of demand” (Esteves, and Reggiani, 2014). From the above formula it is interpreted that, if
Exy = % change in quantity demanded of X/ % change in price of Y
Where, X & Y denote the two commodities and Exy shows the relationship between these two commodities.
Normal goods always have positive income elasticity of demand, as with the increase in consumer's income the demand for more goods arises at each price level. These goods are generally comes under necessity product category which a consumer buy despite of change in income level (Danzon, Towse and Mestreâ€Ferrandiz, 2015). On the other hand inferior goods have negative income elasticity of demand, because with the increase in consumer's income the demand for inferior goods decreases as customers may switch to luxury products. Following formula help in evaluating the income elasticity of demand:
Ey = % change in quantity demanded / % change in income
Where, Ey refers to elasticity of demand and consumer's income has a direct relation with the demand of product.
Elasticity is defined as the degree to which a consumer, producer or individual changes their demand or amount of supply with the changes in the price or income level. Elasticity of demand plays an essential role in decision making process of various companies such as TESCO, Walmart etc. As they operates in dynamic environment where demand of customers changes rapidly (Krishnamurthy and Kriström, 2015). Therefore, it is very essential for TESCO to evaluate the elasticity of demand while formulating various marketing strategies regarding the price of product. Impact of elasticity of demand over TESCO can be better understood using following points:
Price elasticity of demand:- It refers to the measurement of responsiveness in demand of product with the change in the price of commodity. Price elasticity concept explains that the demand of a commodity has an inverse relation with its price. As demand of the product increases with the decrease in price of that commodity and vice-versa. For instance, TESCO offers low price product or services in order to increase the demand of their target market.
Price elasticity of demand has an huge impact over the price related decision making of TESCO. As the demand of customer for a product or services are directly affected by the cost of that commodity. So it is very essential for TESCO to identify various factors such as buying behaviour, value of product to customer and their willing to pay for that product before setting up the price of product (Miller and Alberini, 2016). Like for its grocery product range, TESCO must keep price relatively low as these product have elastic demand and also number of competitors are present in the market which offers same range of product. Therefore, in order to survive in market and increase the demand for product, company is required to keep its price of grocery items at minimum.
On the other hand product range which have inelastic demand such as financial services, TESCO can keep its charges higher (Leamer and Stern, 2017). As these services are not price sensitive and customer's get ready to purchase it at any price if they are getting better return over their investment. Hence, the price elasticity of demand is very essential for TESCO in its price determination decisions.
Cross price elasticity of demand:- This concept of cross price elasticity help in identifying the percent change in demand of a product due to change in price of another product. Cross price elasticity shows the relation between two commodities which are interrelated and both have inverse relationship as change in price of one commodity affect the another. For example, demand of TESCO's product get highly affected by the price of other discount supermarkets. As with the increase in price of product offered by TESCO, customer have an option to switch toward another discount store such as ALDI.
Cross price elasticity is very essential factor to be consider in decision making process as it help TESCO in deciding the price of product which is adoptable by target market and help in increasing the demand of product within market (Mohajeryami and et. al., 2016). This concept generally includes two categories which are as follows:
Income elasticity of demand:- It refers to the change in the demand of product or service due to change in the income level of targeted market. The concept of income elasticity shows the impact of change in consumer's income over the demand of commodity. As consumers with lower income prefer to purchase from stores which offer product at lower price and under the budget of customer. On the other hand, when the income level of customer increases the demand for superior product increases and lower price commodity decreases. For instance, TESCO offers the products that are daily necessities of customers and which they purchase despite of any price change.
Income level of customers also affect the elasticity of demand and price determination decision of a company. As TESCO operates in different countries throughout the world, therefore it is very important for company to evaluate the income level of target market. This help in deciding the price of commodity according to the spending power of customer so that company can maintain demand of its product demand despite of geographical location (Valin and et. al., 2014). As people at different location are different in term of their purchasing behaviour and income level. So TESCO must offer its product or service at discriminate price in different location according to the elasticity of demand for its commodity. For instance, TESCO must offer its commodity at lower price in market which have elasticity in demand and at high price to the market which is less elasticity in demand.
From the above given report it can be summarized that the price of a commodity have an inverse relationship with the demand of that product in marketplace. Therefore the concept of elasticity of demand plays an essential role in decision making process of company for offering its product or services. Application of this concept in decisive practices help an organisation in determining and setting the price of their commodity according to the buying behaviour and spending habit of their target market. This further help in increasing the demand of commodity in market place.
Get more economics samples at samples section of Assignment Desk. To get help with your economics assignment writing tasks, you can contact Assignment Desk -best assignment writing service provider in UK.
Buer, M. C., 2016. ELASTICITY OF DEMAND. In Routledge Revivals: Economics for Beginners (1921) (pp. 36-39). Routledge.
Chandra, A., Gruber, J. and McKnight, R., 2014. The impact of patient cost-sharing on low-income populations: evidence from Massachusetts. Journal of health economics. 33. pp.57-66.
Danzon, P., Towse, A. and Mestreâ€Ferrandiz, J., 2015. Valueâ€based differential pricing: Efficient prices for drugs in a global context. Health economics. 24(3). pp.294-301.
Esteves, R. B. and Reggiani, C., 2014. Elasticity of demand and behaviour-based price discrimination. International Journal of Industrial Organization. 32. pp.46-56.
Krishnamurthy, C. K. B. and Kriström, B., 2015. A cross-country analysis of residential electricity demand in 11 OECD-countries. Resource and Energy Economics. 39. pp.68-88.
Leamer, E. E. and Stern, R. M., 2017. Quantitative international economics. Routledge.
Miller, M. and Alberini, A., 2016. Sensitivity of price elasticity of demand to aggregation, unobserved heterogeneity, price trends, and price endogeneity: Evidence from US Data. Energy Policy. 97. pp.235-249.
Mohajeryami, S. and et. al., 2016. A novel economic model for price-based demand response. Electric Power Systems Research. 135. pp.1-9.
Safdarian, A., Fotuhi-Firuzabad, M. and Lehtonen, M., 2014. Integration of Price-Based Demand Response in DisCos' Short-Term Decision Model. IEEE Trans. Smart Grid. 5(5). pp.2235-2245.
Valin, H. and et. al., 2014. The future of food demand: understanding differences in global economic models. Agricultural Economics. 45(1). pp.51-67.
Get all these features for
Will get back to you within 24 hours