The Concept of Elasticty in Economics and Business
Elasticity is a subject that has a important bearing on marketing, supply and demand
The Concept of Elasticity in Economics
To start with the first question is as to what is elasticity? This is a common word but sometimes to define it is a problem for a layman. Elasticity in general terms means being supple and flexible. But in economics and finance it has a slightly different connotation. In these fields particularly with reference to supply and advertising it refers to a measure as to how people react to variations in prices and supporting ancillaries. It is the reaction of the consumer to changes in price of a product
In specific terms the elasticity of demand gives the level of consumer’s reaction to changes in price of the product. This will generally relate to a change in the quantity demanded. Price and demand are directly related and it follows as a corollary that elasticity of demand does depend on the elasticity of price.
Again advertising elasticity is advertising that caters to demand. Advertising as we know is the seed of demand. A good advertising campaign will lead to a good demand. This is so because a product to be accepted must be known. It must be recognizable. In other words in the long run it must have a brand name.
A product cannot have a brand name without advertising. Elasticity of advertising would mean a response to elasticity of sales. That is quantum of sales is directly proportional to elasticity of supply. Thus it is not difficult to visualize that Elasticity of Demand and Supply have a direct relationship. Both of them in addition have a direct relationship to advertising elasticity.
In commerce a buyer is the king around whom the entire demand and supply rotates. He is the main ingredient of the entire sale process. It is seen that Buyers as a general rule are resistant to price changes. The quantity of demand for goods that suddenly become costlier goes down. For example if a coke costs $0.6 per can and suddenly its price goes up to $2.0 a can then the demand of the product would be affected. This is elasticity of demand and its corollary is elasticity of supply. Both are interconnected. Thus economists make use of elasticity measurements to compare the response of consumers' to price changes for different products. We must bear in mind the factors that define how elastic a demand for a product is. There are generally three rules that amplify this.
a) Firstly remember the greater number of similar substitutes to the goods, the greater the elasticity of demand. b) Secondly, the greater the proportion of a household's budget a good or merchandise constitutes, the more elastic the demand.
c) Lastly period (time) and elasticity are again inter-related. The longer the period under consideration, the more elastic the demand.
The change in sales that results from each monetary unit (e.g. pound or dollar) that is spent on advertising is advertising elasticity. Its relationship is similar to other elasticity's like price elasticity. The formula is:
(ΔS)/(S) ÷ (ΔA)/ (A)
Where S is the quantity sold
A is the advertising expenditure
Δs is the change in quantity sold and
ΔA is the change in advertising expenditure.
Advertising elasticity directly relates to elasticity of sales. Sales are again directly proportional to elasticity