What I need to know about elasticity

Answer 1

Elasticity is a term used to describe the responsiveness of demand or supply to changes in price. It measures the extent to which the quantity demanded or supplied changes in response to a change in price.

Here are some key things to know about elasticity:

1. Price Elasticity of Demand (PED): This measures the responsiveness of demand to changes in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. If the value of PED is greater than 1, demand is considered elastic, indicating that a change in price will have a relatively large impact on quantity demanded. If the value is less than 1, demand is considered inelastic, indicating a relatively small impact on quantity demanded.

2. Factors affecting PED: The PED of a good depends on several factors including the availability of substitutes, the proportion of income spent on the good, time period considered, and the necessity of the good.

3. Price Elasticity of Supply (PES): This measures the responsiveness of supply to changes in price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. If the value of PES is greater than 1, supply is considered elastic, indicating that a change in price will have a relatively large impact on quantity supplied. If the value is less than 1, supply is considered inelastic, indicating a relatively small impact on quantity supplied.

4. Factors affecting PES: The PES of a good depends on factors such as the availability of inputs, production time, and the ability to store or create inventory.

5. Cross-Price Elasticity of Demand (XED): This measures the responsiveness of demand for one good to changes in the price of another good. It is calculated as the percentage change in quantity demanded of good X divided by the percentage change in the price of good Y. The value of XED can be positive or negative depending on whether the goods are substitutes or complements.

Understanding elasticity is important for businesses, policymakers, and consumers. It helps businesses determine the impact of price changes on quantity demanded or supplied, assists policymakers in designing effective taxation policies, and aids consumers in making informed decisions about purchasing goods.