What Happens If Bread Price Exceeds Meat Price…
WHAT ARE FLEXIBILITIES?
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Price elasticity of supply
Why is it important to know these?
Namely; Knowing the effect of a one-unit change in the price of a good on the change in demand may not add much to you at first, but understanding the logic of it adds a lot to you.
1. Price elasticity of demand expresses the sensitivity of the quantity demanded to the change in the price of the good itself.
In other words, it indicates how a unit price increase or decrease in a good affects the increase or decrease in the quantity demanded of that good.
You do not need to know how this is calculated, I will write it as a detailed answer to those who want it. But the result of the calculation is one of the following 3 results;
price elasticity of demand
- If it is greater than 1, demand is elastic. So it is sensitive to changes.
- If it is equal to 1, demand is unit elastic. So the change in both is the same.
- If it is less than 1, demand is inelastic. So it is not affected much by changes.
Let's look at some examples;
- According to some studies, cigarettes have been identified as a commodity with an inelastic demand. That is, the price elasticity of demand is less than 1. This means, for example, when the price of a 10 TL pack of cigarettes increases by 10% to 11 TL, the quantity demanded decreases only by very small amounts (about 2% according to a study).
A friend of mine said that even if the cigarette prices go up to 100 TL, real smokers and non-smokers should separate... :)
- Demand for oil is also inelastic. That is, the price elasticity of demand is less than 1. Despite the increase in prices, the amount of consumption decreases very little.
- Demand is elastic in durable goods such as automobiles and white goods. That is, the price elasticity of demand is greater than 1. This means that the rise in prices for such goods significantly reduces the quantity demanded.
The following conclusions can be drawn from this, that changes in price for essential (partially mandatory) goods do not affect the quantity demanded much. However, it is very effective in non-essential luxury goods.
For example, there are poor and necessary goods. For example, if the price of bread doubles, there will be no change in the quantity demanded. In other words, no one will give up because a bread that costs 2 TL is 4 TL.
But when bread prices catch up and exceed meat prices (don't say no, there is no such thing in our world anymore), people eat meat instead of bread.
Here, too, the concept of substitute goods emerges in the economy. In other words, when the price of a good increases, if there is a substitute, there will be a transition (increase in demand) to it, so its demand falls and the demand for its substitute increases.
The most obvious example of this is cars; There are so many car brands around us that the X brand has increased a lot, we don't care, we get its equivalent, the Y brand.
However, the demand for non-substituted and essential goods (for example, water) increases as much as it wants, and the demand does not decrease. (Only to save)
The other 3 flexibilities are in the next sections.
Stay well.
Economic Notes 2.