elastic ecomomics

elastic ecomomics

The Impact of Elasticity on Economics

1. Introduction to Elasticity in Economics

The elasticity of demand measures the percentage change of quantity demanded for a good or service with respect to a change in price. This brings to light a variety of possible consequences. It not only impacts the nature of the demand curve for the good, it is also used to determine how firms are being affected by the price of the goods. Elasticity is important in trying to figure out how sales revenues change with a change in price of a good. It also reveals the reason for the change of total revenue with fluctuations in price changes. This information allows a company to set prices and demand to maximize sales revenue and to understand how lower prices result in a fall of sales revenues. This discussion of the elasticity of demand can be linked to supply side economics.

Elasticity in economics is a tool that is used in an effort to measure how things will change. When an economist measures elasticity, they are trying to figure out how one thing changes in relation to another. There are two basic types of elasticity: 1) Elasticity of demand and 2) Elasticity of supply. Elasticity measures how demand and supply change in relation to the price changes of other goods and services, sometimes leading to unexpected and wide-ranging consequences. These two types of elasticity use a formula to determine their outcomes. In addition, there are some factors which can impact the elasticity of both supply and demand. The ratio of sales revenue and the intent of purchasing can be considered by the company in an effort to determine the elasticity demand they will have.

2. Types of Elasticity Measures

Price Elasticity of Demand (PED): PED measures the relative responsiveness of the quantity of a commodity demanded to a change in its price, ceteris paribus. This is important because it has been observed that a change in the price of a commodity affects not only the quantity demanded of the commodity but also the revenue generated from the sale of the commodity. If the demand for a good is price elastic, then a 1% change in quantity leads to more than a 1% change in price, then that good is likely to experience a more than 1% change in revenue in response to a price change. If a product has a price elasticity of demand between 0 and infinity, then the product is price inelastic; if the elasticity is zero, the product is perfectly inelastic; if the elasticity is equal to infinity, the product is perfectly elastic.

Elasticity in economics refers to the responsiveness or sensitivity of the quantity demanded or supplied of a good to a change in some external variables. Elasticity is a concept used in many economic contexts when the relation between two variables exhibits average percentage growth. There are several measures for different economic outcomes: price elasticity of demand (PED), price elasticity of supply (PES), income elasticity of demand, and cross-price elasticity of demand. There are many different ways of measuring elasticity and many different logical structures in which elasticity is utilized even if the measure of elasticity is the same.

Introduction to Types of Elasticity Measures

3. Applications of Elasticity in Economic Analysis

Microeconomic theory of demand and supply shows how the market structure sets the prices and quantities in a market that optimize the allocation. Consumers, workers, and entrepreneurs have individual elasticities of response to changes in the macroeconomic situation. In markets, the shapes of the other curves in the model that determine individual price or quantity values may reveal different responses to a change in market conditions. The elasticities that describe people’s and businesses’ amounts of response to changes in production recommendations or resulting individual intertemporal pricing and quantity results provide comparative statics information.

Elasticities have a wide variety of applications. Because elasticities give specific values for the response of one dependent variable for a one percent change in an independent variable, they facilitate comparisons of the degrees of responsivity of different systems. The result of any reasoned qualitative argument about effects of changes in quantities becomes more meaningful if a comparison of percentage effects is included. Applications are enlightening. They explain how to distinguish different types of goods and describe behaviors of such factors as land, labor, and capital. Political and economic policy implications arise from questions about how to steer the economy or how to achieve learning and technological progress. A large group of applications appears in fields related to demand and supply, and in the microeconomic analysis of resource allocation.

4. Factors Influencing Elasticity of Demand and Supply

This is because when prices or incomes change, people are allowed more time to adjust their behavior to these changes. Generally, demand is more elastic when the following hold true: there are more close substitutes available, the more necessary for consumers, the more inelastic. The adjustment strategy is to look at how long the demand has taken in changing consumption habits. The longer the time is, the larger the number of sectors must be included in measuring the changes through consumption habits. The entrepreneurship under consideration is a durable commodity. Proportion is the only budget allocated to purchasing items. Uses the time is not incomplete. When companies are faced with increased prices, to produce undifferentiated products are borne by the seller. Buyers on the final product are usually the last in the chain. The fact that the final product price increases are not immediately reflected in a surrogate product that is used to shield the first and such final product is typically increased in prices.

The extent to which something reacts to a change in another variable can be estimated by measuring the change between the initial state and the homeless state. When the change is large, something is said to be elastic. If the change is small, it is said to be less elastic. Demand and supply are usually more elastic in the long term than in the short term.

The impact of elasticity on economics. Chapter 4: Factors Influencing Elasticity of Demand and Supply.

5. Implications of Elasticity for Economic Policy

We can thus add another view on the importance of elasticity in economics to our collection: By affecting who has the biggest say on what, elasticities affect the fundamentals that drive almost all production choices. They can guarantee the effective establishment of the goals set, and they are very crucial in the construction of policy evaluation exercises. If elasticity is indeed receiving the right amount of attention in economics, we should have to wonder where in macroeconomics we should be talking about, especially at this period of secular stagnation, a time when policy will necessitate much more creativity. Central banks acknowledge the existence of congestion and pollution by taking carbon emission and equivalent taxes into account when doing their job. Would it not make sense to extend these sorts of policies to other areas of concern?

5. Implications of elasticity for economic policy: Prices affect our lives in many ways. They affect how we dispose of certain goods and invest in others, and they influence our behavior when facing systemic phenomena such as congestion and pollution. It is only natural to expect that changes in prices would also bring some improvements to these facets of our lives. The core of economic policy is nothing but estimating these potential improvements. In order to make this estimation, it is necessary to know the likely price changes according to the policy. These, in turn, depend on how the demanders and the suppliers react to these price changes, averaged by the influence of income changes. This means that the response of elasticities is central to the construction of policy recommendations.