ELASTICITY OF PRICE EXPECTATIONS

People’s price expectations also play a significant role as a determinant of demand.

J.R. Hicks, the English economist, in 1939, devised the concept of elasticity of price expectations.

  The elasticity of price expectations may be defined as the ratio of the relative change in expected future prices to the relative change in current prices.
Ex = relative change in expected future prices/relative change in current prices

e_x = P_f/P_f/ P_c/P_c =  P_f/ P_c  .P_c/P_f                         

Where,

           P_{c =}
Current prices

Pf =Future prices

If ex > 1 Buyers expect that future prices will rise by a larger percentage than current prices.

ex = 1 Buyers expect that future prices will rise by the same percentage as current prices.

ex < 1 Buyers expect that future prices will rise by a smaller percentage than current prices.

ex = 0 Buyers expect current rise to have no effect on future prices.

ex < 0 Buyers expect that current rise will be followed by a fall in future prices.

The concept of elasticity of price-expectation is very useful in formulating pricing policy.