Microeconomics: Elasticity Concepts Quiz

Microeconomics: Elasticity

Introduction

Microeconomics is the branch of economics that studies the behavior of individuals and businesses in making decisions related to the allocation of scarce resources and the creation of goods and services. One of the fundamental concepts in microeconomics is elasticity, which measures the responsiveness of economic variables such as supply and demand to changes in prices.

Price Elasticity of Demand

The most widely discussed form of elasticity is the price elasticity of demand. It measures the responsiveness of the quantity demanded of a good or service to a change in its price. If the percentage change in quantity demanded is less than the percentage change in price, the demand is considered inelastic, implying that consumers are less sensitive to price changes. On the other hand, if the percentage change in quantity demanded is greater than the percentage change in price, the demand is elastic, indicating that consumers are highly responsive to price changes.

The unit elasticity of demand is another important concept in microeconomics. It represents a special case where the percentage change in quantity demanded equals the percentage change in price. In this scenario, the price elasticity of demand is equal to one, hence it is sometimes called unitary elasticity.

Calculating Price Elasticity of Demand

To calculate the price elasticity of demand, one uses the following formula:

PED = (% Change in Quantity Demanded) / (% Change in Price)

For instance, suppose the price of strawberries increases by 10%, and customers purchase 20% fewer strawberries as a result. Using the formula above, the price elasticity of demand for strawberries would be -20%. Since the negative sign indicates that the decrease in quantity demanded follows an increase in price, the price elasticity of demand is a negative number.

Elasticity of Supply

Another significant type of elasticity in microeconomics is the elasticity of supply. It measures the responsiveness of a supplier to changes in price. Unlike price elasticity of demand, which indicates consumer responses, price elasticity of supply reflects producer responses.

There are several types of elasticity of supply, including perfectly elastic, elastic, unit elastic, inelastic, and perfectly inelastic supply. These categories range from suppliers responding immediately to price changes (perfectly elastic) to those showing little or no response (perfectly inelastic).

Elasticity of Substitution

The elasticity of substitution is a concept in microeconomics that assesses the degree to which one input can replace another. It provides insights into the degree of substitutability among different inputs.

Elasticity of substitution is particularly relevant in the context of production functions, which describe the relationship between the quantities of various inputs and the production of goods or services. Higher values of elasticity imply a greater ability to substitute one input for another without affecting the production function significantly.