Economic
Elasticity
Demand
& Supply
Introduction:
Economic elasticity is a tool
which helps to measure different economic variables with one another. For an
example it helps to identify and measure the economic variables like price and
demand. Measurements of economic variables are important in economic activities
which help us understand the economic activities and in decision making. It
helps us understand the problem of scarcity, which
is the problem of fulfilling the unlimited wants of humankind with limited or
scarce resources.
Origin:
Alfred Marshall (1842 – 1924)
contributed much to economics. He is the first one to introduce the demand
supply analysis and the concept of elasticity. According to Marshall "The elasticity (or responsiveness) of demand
in a market is great or small according as the amount demanded increases much
or little for a given fall in price, and diminishes much or little for a given
rise in price".
Price
Elasticity of Demand:
According to the Elasticity of
Demand, if the price of the commodity goes up then the quantity of the commodity
falls; both are inversely proportional to each other.
Types of Economic Elasticity:
Elasticity is the
percentage of change in quantity with respect to the change in price. There are
three types of economic elasticity; they are Elastic, Inelastic and Unitary
Elastic.
Elastic Demand and Supply
When the price of a
commodity falls to a certain percentage but the impact of the price increase
leads to drastically reduce the demand of the commodity to more than
proportionate levels then it is called elastic demand. If the elasticity is
greater than or equal to one then the curve is considered to be elastic.
Inelastic
Demand and Supply:
In this case a small increase
in price will have less than proportionate amount of impact on the demand; that
is a small increase in price will bring about a small decrease in demand; it is
otherwise called ‘low price-elasticity
of demand’. In this case a price increase in 5% will bring about a fall in
quantity demanded by people of less than 5%. If the elasticity is less than one
then the curve is said to be inelastic.
When E< 1, this is a case of inelastic demand
Supply
and Demand:
It is regarding the effects on
price and quantity in a market. It helps to predict and maintain the economic
equilibrium of price and quantity by analyzing the functions of price and
quantity demanded.
Factors
Affecting the Demand Elasticity:
The most important factor which
influences the elasticity of goods or supply is the availability of
substitutes. If some other substitutes are available in the market, the price increases
of the good will encourage the buyers to switch their choices to another
product.
Another important factor is the
goods that are used regularly and if the price goes up, buyers tend to reduce
the quantity consumed.
The third factor is time that
is if the price increase is certain it will have an effect on demand. For example,
if a pack of cigarettes goes up, and the buyers find it hard to afford then
slowly they will come out of the habit of smoking.
Conclusion:
The elasticity varies among the
products because some commodities are more essential than the others. The goods
and services are considered to be highly elastic and if a slight change is made
to the price it leads to sharp change in the quantity demanded.
Sources:
Automobile Prices in Market equilibrium, Econometrica 63
(July 1995), S Berry, J Levinson and A. Pakes
Principles of Economics, Arthur O'Sullivan and Steven M.
Sheffrin, 1st edition, Prentice Hall, (2002).
http://www.nvcc.edu/home/sdas/elasticity/
http://www.springer.com/economics/development/book/978-0-387-24292-7
No comments:
Post a Comment