Concept of Price elasticity:
It is a relationship between change in quantity demanded and change in its price. In economics, it is also termed as price sensitivity.
Price elasticity of demand= % Change in quantity demanded/ % Change in price
If the quantity demanded for a good increases 20% and there is 10% decrease in price, the price elasticity of demand would be 20 %/ 10% = 2.
Elastic demand: Small change in price leads to big change in quantity demanded. It is a situation where the people will stop buying the product or greatly reduce its demand when the price increases. Examples: They are luxurious goods. In case of jewellery, people will reduce its demand when price rises.
Inelastic demand: When there is a big change in price which leads to small change in quantity demanded. Examples: They are non-luxurious goods. In case of milk, water, people will buy these products even if their price increases.
How it helps Companies?
Inelastic demand tells that when a company increases price, its revenue will decrease.
Elastic demand tells that the decrease in price of product will attract revenue.
DEMAND OF GOLD IN THE RECENT YEARS:
According to the recent news, Hindustan Times, Mumbai, India, 22 April, Gold prices fell by Rupees 100. This decrease in the price of Gold lead to the 15% increase in sales with some jewellers but the sales were not strong enough. The reasons could be many. Let it be the dollar strengthening or the interest rates rising in the U.S. Investors are unlikely to invest in gold due to the rising rates in the U.S. Also, the severe damage to crops in India distract gold demand from rural families. Thus, investment in gold has weaken these days in India.
There are a lot of products or things around us that let us know if there demand is elastic or inelastic. Let’s talk about some examples of elastic demand and inelastic demand and also if there are any exceptions.