Managerial point of view, it is very important to know the factors that can change the level of demand. It is addressed by the demand sensitivity. The study of demand sensitivity is the analysis of the sensitivity or responsiveness of demand for a product to the change in factors or parameters that constitute the underlying demand function. Price of product, price of raw materials used to produce the product, expectations of the price, consumer income, their preferences, their taste, etc. are the factors that can have an impact on the demand level. It is important for managers to be aware of the effects of altering these parameters when they are making decisions. For instance, a business recession comes into the picture. It, in turn, leads to reduce the consumer income. Then, a manager must know the effects of changes in the consumer income on demand. If, for example consumer income has reduced, the management can take the corrective action in advance such as the necessary cutting down of price. The price cut will offset a decline in sales caused by the fall in consumer income. Because of this action, the business wouldn’t be hampered and could be lifted up. These all would be possible through the use of the demand elasticity.
Isn’t it amazing that we can trap the sensitivity of demand in number terms? Elasticity of demand measures the responsiveness of the demand to changes in one of these parameters, keeping constant the other factors of the demand function. In demand function, demand is considered as a dependent variable and other parameters that influence the demand level are considered as the independent variables.
Elasticity of demand is defined as the percentage change in the demand; a dependent variable, resulting from a 1% change in the value of an independent variable; any one factor that has impact on the demand level. Elasticity of demand can be calculated using formula given below: