Economics: Understanding Elasticity

What is Elasticity?

• Elasticity is a measure of how responsive one variable is to a change in another variable.
• In economics, elasticity is used to measure the responsiveness of demand or supply of a good to changes in its price or other influential factors.

Types of Elasticity:

• Price Elasticity of Demand: Measures how responsive the quantity demanded of a good is to a change in its price.
• Price Elasticity of Supply: Measures how responsive the quantity supplied of a good is to a change in its price.
• Income Elasticity of Demand: Measures how responsive the quantity demanded of a good is to a change in consumer income.
• Cross-Price Elasticity of Demand: Measures how responsive the quantity demanded of one good is to a change in the price of another good.

Elasticity Formula:

• Price Elasticity of Demand: Ed = (ΔQ/Q) / (ΔP/P)
• Price Elasticity of Supply: Es = (ΔQ/Q) / (ΔP/P)

Elasticity Interpretation:

• Elastic (Ed > 1): A small change in price leads to a large change in quantity demanded.
• Inelastic (Ed < 1): A large change in price leads to a small change in quantity demanded.
• Unit Elastic (Ed = 1): A change in price leads to a proportional change in quantity demanded.
• Perfectly Elastic (Ed = ∞): A small change in price leads to an infinite change in quantity demanded.
• Perfectly Inelastic (Ed = 0): A change in price leads to no change in quantity demanded.

Factors Affecting Elasticity:

• Availability of substitutes: More substitutes, more elastic.
• Degree of necessity: Less necessary, more elastic.
• Time period: Longer time period, more elastic.
• Proportion of income: Larger proportion of income, more elastic.
• Consumer preferences: Stronger preferences, less elastic.

What is Elasticity?

• Elasticity measures how responsive one variable is to a change in another variable.
• In economics, elasticity is used to measure the responsiveness of demand or supply of a good to changes in its price or other influential factors.

Types of Elasticity:

• Price Elasticity of Demand: Measures how responsive the quantity demanded of a good is to a change in its price.
• Price Elasticity of Supply: Measures how responsive the quantity supplied of a good is to a change in its price.
• Income Elasticity of Demand: Measures how responsive the quantity demanded of a good is to a change in consumer income.
• Cross-Price Elasticity of Demand: Measures how responsive the quantity demanded of one good is to a change in the price of another good.

Elasticity Formula:

• Price Elasticity of Demand: Ed = (ΔQ/Q) / (ΔP/P)
• Price Elasticity of Supply: Es = (ΔQ/Q) / (ΔP/P)

Elasticity Interpretation:

• Elastic (Ed > 1): A small change in price leads to a large change in quantity demanded.
• Inelastic (Ed < 1): A large change in price leads to a small change in quantity demanded.
• Unit Elastic (Ed = 1): A change in price leads to a proportional change in quantity demanded.
• Perfectly Elastic (Ed = ∞): A small change in price leads to an infinite change in quantity demanded.
• Perfectly Inelastic (Ed = 0): A change in price leads to no change in quantity demanded.

Factors Affecting Elasticity:

• Availability of substitutes: More substitutes make demand more elastic.
• Degree of necessity: Less necessary goods have more elastic demand.
• Time period: Longer time periods lead to more elastic demand.
• Proportion of income: Goods that consume a larger proportion of income have more elastic demand.
• Consumer preferences: Stronger preferences make demand less elastic.