Elasticity of Price Expectations

Elasticity of Price Expectations

Sometimes, mainly during the period of price fluctuations, consumer’s price expectations play a much more important role in determining demand for a commodity than any other factor. The concept of price expectation elasticity was devised and popularized by J.R. Hicks. The price expectation elasticity refers to the expected change in future price as a result of change in current prices of a product. The elasticity of price expectation is defined and measured by the following formula:

The coefficient  gives the measure of expected percentage change in future price as a result of 1 percent change in present price.  If > 1, it indicates that future change in price will be greater than the present change in price, and vice versa. If  = 1, it indicates that the future change in price will be equal to the change in the current price.

The concept of elasticity of price expectation is very useful in formulating future pricing policy . For example if > 1, it indicates that sellers will be able to sell more in the future at higher prices. Thus, businessmen may accordingly determine their future price policy.