COVER PAGE

TABLE OF CONTENTS

TABLE OF CONTENTS...............................................................................................2
1.0 INTRODUCTION....................................................................................................3
1.1 Concept of Elasticity.........................................................................................3
2.0 CONTENTS.............................................................................................................5
2.1 Elasticity of Demand.........................................................................................5
2.2 Elasticity of Supply...........................................................................................7
2.3 Elasticity Concept On Tax Burden....................................................................9
2.4 Elasticity Concept On Benefits Of Subsidies..................................................12
3.0 CONCLUSION......................................................................................................16
4.0 REFERENCE.........................................................................................................17

1.0 INTRODUCTION
1.1 Concept of Elasticity
Elasticity is a measure of just how much the quantity demanded will be affected by a
change in price or income or change in price of related goods. How much a request or
supply bend responds to an adjustment in cost is the bend's Elasticity. Elasticities can
be estimated for price, income, prices of related products, and advertising
expenditures.

The own-price elasticity is the ratio of the percentage change in

quantity demanded to the percentage change in price, and is a negative number.

Demand is price elastic if a 1% increase in price leads to more than a 1% drop in
quantity demanded, and inelastic if it leads to less than a 1% drop in quantity
demanded.
A decent or administration is thought to be exceptionally flexible if a slight change in
value prompts to a sharp change in the amount requested or provided. Normally these
sorts of items are promptly accessible in the market and a man may not really require
them in his or her day by day life. The own-price elasticity can be used to forecast the
effects of price changes on quantity demanded and buyer expenditure. Elasticities can
be used to forecast the effects on demand of simultaneous changes in multiple factors.
All elasticities vary with adjustment time. The long-run demand is generally more
elastic than the short-run demand in the case of nondurables, but not necessarily for
durables.

Elasticity is a monetary idea that is utilized to quantify the adjustment in the total
amount requested for a decent or administration in connection to value developments
of that great or administration. An item is thought to be flexible if the amount request
of the item changes definitely when its cost increments or abatements. Alternately, an

item is thought to be inelastic if the amount request of the item changes next to no
when its cost vacillates.
Examples of elastic goods are coffee, airline tickets and stocks. Examples of inelastic
goods are water, electricity, and telephone service. The elasticity of a good is the
sensitivity of its demand to changes in its price. If an increase or decrease in price has
little or no effect on the demand for the good, then the good is considered to be highly
inelastic. Likewise, if an increase or decrease in price has a dramatic effect on the
demand for the good, then the good is considered to be highly elastic. A couple of
factors that determine the elasticity of goods include the existence of substitutes and
disposable income. If a good has a close substitute, consumers choose to purchase the
substitute if the good rises in price. Assuming that a consumer's income level remains
the same, if the price of a good rises then so does its opportunity cost, which means
that purchasing the same amount of the good as before comes at a higher expense. In
situations in which prices are rising and incomes are constant, consumers choose not
to purchase luxury goods, such as airline tickets and stocks. Goods such as water and
electricity are inelastic because they have an innate biological or sociological demand.

2.0 CONTENTS
2.1 Elasticity of Demand
Elasticity of demand is an important variation on the concept of demand. Demand
can be classified as elastic, inelastic or unitary. An elastic demand is one in which the
change in quantity demanded due to a change in price is large. An inelastic demand is
one in which the change in quantity demanded due to a change in price is small.
The formula for computing elasticity of demand is:
Q1 Q2) / (Q1 + Q2)
( (P1 P2) / (P1 + P2)
If the formula creates a number greater than 1, the demand is elastic. In other words,
quantity changes faster than price. If the number is less than 1, demand is inelastic.
In other words, quantity changes slower than price. If the number is equal to 1,
elasticity of demand is unitary. In other words, quantity changes at the same rate as
price.
2.1.1 Elastic Demand
The demand is elastic when with a small change in price there is a great change in
demand; it is inelastic or less elastic when even a big change in price induces only a
slight change in demand. In the words of Dr. 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.But the demand cannot be perfectly elastic or
inelastic.
Completely elastic demand will mean that a slight fall (or rise) in the price of the
commodity concerned induces an infinite extension (or contraction) in its demand.
Completely inelastic demand will mean that any amount of fall (or rise) in the price of
the commodity would not induce any extension (or contraction) in its demand. Both

these conditions are unrealistic. That is why we say that elasticity of demand may be
more or less, but it is seldom perfectly elastic or absolutely inelastic.

Demand is said to be very elastic when even a small change in the price of a
commodity leads to a considerable extension/contraction of the amount demanded of
it. In Fig. 10.3, DD curve illustrates such a demand. As a result of change of T in the
price, the quantity demanded extends/contracts by MM, which clearly is
comparatively a large change in demand.
Close substitutes for a product affect the elasticity of demand. It another product can
easily be substituted for your product, consumers will quickly switch to the other
product if the price of your product rises or the price of the other product declines.
For example, beef, pork and poultry are all meat products. The declining price of
poultry in recent years has caused the consumption of poultry to increase, at the
expense of beef and pork. So products with close substitutes tend to have elastic
demand.
2.1.2 Inelastic Demand
Inelastic Demand Inelastic demand is shown in Figure 2. Note that a change in price
results in only a small change in quantity demanded. In other words, the quantity
demanded is not very responsive to changes in price.
Examples of this are necessities like food and fuel. Consumers will not reduce their
food purchases if food prices rise, although there may be shifts in the types of food
they purchase. Also, consumers will not greatly change their driving behavior if
gasoline prices rise.

Figure 2
When even a substantial change in price brings only a small extension/contraction in
demand, it is said to be less elastic. In Fig. 2, DD shows less elastic demand. A fall
of NN in price extends demand by MM only, which is very small.

2.2 Elasticity of Supply

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a

change in price. It is necessary for a firm to know how quickly, and effectively, it can
respond to changing market conditions, especially to price changes. In other words ,
the elasticity of supply is the percentage change in quantity supplied associated with a
percentage change in price. The following equation can be used to calculate PES.

When a small drop in price leads to great contraction in supply , the supply is
comparatively elastic but a big fall in price leads to a very small contraction in supply,
the supply is said to be comparatively inelastic . Conversely , a small rise in price
leading to a big extension in supply shows elastic supply, and a big rise in price
leading to a small extension in suppy indicates inelastic supply . It has two types
which is ;
i.

Perfectly Elastic Supply

ii. Perfectly Inelastic Supply

2.2.1 Perfectly Elastic Supply
When a small rise in price leads to infinitely large supply , supply is said to be elastic .
Supply is said to be perfectly elastic when any amount of units are supplied at the
same price . A product has elastic supply when a price change causes a significant
change in the quantity supplied.

In the case of a perfectly elastic supply the price elastic of supply is equal to infinity,
which indicates that the quantity supplied is highly responsive to a change in the
price. A perfectly elastic supply curve is depicted by a horizontal line.
2.2.2.Perfectly Inelastic Supply
When a change in price does not lead to any change in quantity supplied , supply is
said to be perfectly inelastic . A price change causes very little change in the quantity
supplied means Inelastic

In the case of a perfectly inelastic supply the quantity supplied does not respond to a
change in the price and the price elasticity of supply is equal to zero. A perfectly
inelastic supply curve is depicted by a vertical line.

2.3 Elasticity Concept On Tax Burden

The tax biases against saving and investment and the current system's steeply
graduated tax rate structure were introduced for the purpose of improving "social
equity". It has been assumed that the added layers of tax on income used for capital
formation would do little economic damage, would harm only the wealthy, and would
provide significant income redistribution. It has become apparent, however, that most
of the taxes that seem to fall on those who supply physical capital, intellectual capital,
or special talents to the production process may actually be shifted to ordinary
workers and lower income retirees in the form of reduced pre-tax and after-tax
incomes.
Elasticity And The Deadweight Loss Caused By A Tax;

Elasticity of supply and demand plays an important part in determining how the
burden of a tax is distributed between buyer and seller. There is illustration how these
elasticities influence the size of the excess burden, or deadweight loss, caused by the
tax. Reducing trade by taxing it not only transfers revenue (amount of the tax per unit,
multiplied by the number of units sold after the tax) from buyers and sellers to the
government, but it also reduces the gains from trade for both buyers and sellers by the
transferred amount, plus somewhat more.
Trades that would have taken place in the absence of the tax are eliminated. When
either demand or supply is inelastic, meaning that few trades are discouraged by
imposition of the tax, the excess burden is smaller. Since demand is highly inelastic,
the quantity of gasoline traded declines by only 6 million gallons as the result of the
$.20 tax.In contrast, when both demand and supply are elastic, more trades are
prevented by the tax. Given the more elastic demand and supply curves , the quantity
of gasoline produced and sold declines by 21 million gallons (from 200 million to 179
million). As the deadweight triangle illustrates, the excess burden of a tax increases
as the higher tax cuts off more exchanges. Therefore, the burden of excise taxes will
be less if they are levied on goods and services for which either demand or supply is
highly inelastic.

2.3.1

Inelastic

Supply

and

Elastic

Demand

Tax

Burden

If a producer is inelastic, he will produce the same quantity no matter what the price.
If the consumer is elastic, the consumer is very sensitive to price. A small increase in
price leads to a large drop in the quantity demanded

The imposition of the tax causes the market price to increase from P without tax to P
with tax and the quantity demanded to fall from Q without tax to Q with tax. Because
the consumer is elastic, the quantity change is significant. Because the producer is
inelastic, the price does not change much. The producer is unable to pass the tax onto
the consumer and the tax incidence falls on the producer. In this example, the tax is
collected from the producer and the producer bears the tax burden.
In general, the tax burden will be greater for the group exhibiting the greater
relative inelasticity.

2.4 Elasticity Concept On Benefits Of Subsidies

Subsidies refers to any government assistance to producers or consumers for which

the givernment has no compensation in return. Government usually extend subsidies
with the aim of encouraging production and consumption . Subsidies are usually
extended to farmers , to processors manufacturers/distributors and trasporters to
reduce prices .
Type of subsidies are as follow
a.

Cash grants - The government makes direct payments to the consumers or

producers

b.

Credit subsidies The government makes policies which support extensions of

loans to the beneficiaries at unrealistic interest rates an with government
guarantees.

c.

Tax subsidies - This involves reduction in specific tax liabilities

The deadweight misfortune because of an appropriation is a type of monetary

wastefulness. It's a lessening in purchaser and maker excess, and is an aftereffect of
the way that the appropriation causes more than the socially best measure of the great
is created. What's more, what is delivered is sold at too low a cost. Another way
market analysts depict this outcome is to state that appropriations twist the
designation of assets. It's simply one more method for saying that when the
endowment is in truth, a lot of society's assets will be dedicated to the great.
It is not necessarily the case that legislature ought to never utilize assessments and
appropriations to impact a market. As a rule people are set up to acknowledge the
deadweight misfortune because of endowments if the administration can give benefits
that the market would some way or another neglect to give. For instance, if firms
creating a decent or administration give huge outer advantages (neighborhood
impacts) for which they are not adjusted, then the organizations will under deliver,
leaving a part for government in expelling the wastefulness
2.4.1 Application of Subsidies

Figure 1) at the right shows the supply and demand curve for apples. The consumer
surplus in a free market, before-subsidy, world is the area a, while the producer
surplus is area b.
When the subsidy is granted, the supply curve falls, as in Figure 2), and the market
price falls to p1. (Note that the supply curve shifts down by the exact amount of the
subsidy.) There is an increase in consumer surplus by c + d + e. So consumers
become better off.
When the subsidy is granted, producers become better off as well, and their surplus
increases by f + g in Figure 3).
Finally, we come to the government, who, after all is paying the bill for this. The cost
to the government is the area of the rectangle (p2 p1) times Q1. Notice that this
area is larger than the combined gain to producers and consumers by the amount x. In
other words, there is a deadweight loss in welfare equal to x.

2.4.2 Benefit from Subsidies

2.4.2.1 The Static Effects Of Subsidies On Efficiency

Market analysts may not concur among themselves on the exact meaning of an
endowment, however they do for the most part concede to their static, first-arrange
impacts. Hypothesis demonstrates that these rely on upon various components, among
which are the responsiveness of makers and shoppers to changes in costs (what
financial analysts call the claim value versatilities of free market activity), the type of
the endowment, the conditions connected to it, and how the appropriation interfaces
with different arrangements.
The individuals who take a more benevolent view contend that endowments can serve
redistributive objectives, or can adjust showcase disappointments. In any case, as
general society back market analyst Ronald Gerritse once cautioned, dies down
protected on such grounds "may have externalities that we didn't expect." Indeed it is
such second-arrange impacts that have gone under assault by natural financial experts
as of late.
2.4.2.2 Effects On The Environment
Governments don't set out deliberately to harm the earth only for it. They may not
think especially about the ecological outcomes of the exercises they bolster, however
that is not exactly a similar thing. Or maybe, when individuals talk about "earth
unsafe endowments" they by and large mean sponsorships that bolster creation,
transport or utilization that winds up harming nature. The natural outcomes of
endowments to extractive ventures are firmly connected to the action being
sponsored, such as angling or logging.
While numerous appropriations have unintended negative outcomes on the earth, very
much planned sponsorships can be advantageous when they work to moderate an
ecological issue. With regards to fisheries, for example, these would incorporate
endowments to administration programs that guarantee that fisheries assets are
properly overseen and that directions are authorized, or to innovative work (R&D)
intended to advance less naturally ruinous types of fish finding and preparing.

Government usually intervenes in a market for one or more of the following reasons:
to correct a market failure, to change the distribution of a markets benefits, or to
encourage or discourage the consumption of particular goods and services.
Governments may also tax goods and services in order to raise public revenues. A
price ceiling is a maximum legal price at which a good can be sold. A binding price
ceiling causes a shortage, because at the legally mandated price, consumers will
demand more than producers supply. This policy benefits some consumers, because
they are able to buy what they want at a lower price, but other consumers are unable
to find the goods they want. Producers lose out because they sell less at a lower price
than they would without the price ceiling.
Government usually intervenes in a market for one or more of the following reasons:
to correct a market failure, to change the distribution of a markets benefits, or to
encourage or discourage the consumption of particular goods and services.
Governments may also tax goods and services in order to raise public revenues.
A subsidy is a payment that the government makes to buyers or sellers of a good for
each unit that is sold. Subsidies increase the size of a market, encouraging the
consumption and production of the good being subsidized. The effect is the same
regardless of whether the subsidy is paid to buyers or sellers. Both consumers and
producers benefit from a subsidy, but taxpayers must cover the cost.

3.0 CONCLUSION
Today, albeit more modern work than any time in recent memory is being done in the
duty field, it gives the idea that the first bits of knowledge of the established pioneers
still remain constant. Strenuous endeavors to discover special cases to the "law of
interest" have to a great extent come a cropper. It is still the best assumption that, if

something is made more costly, individuals will purchase less of it, and if something
is made less costly, individuals will purchase a greater amount of it. This law still
applies to work, sparing, and speculation, and to the exchange off amongst present
and future utilization, and between utilization of market products and relaxation.
Increment the duty on exertion, and less will be provided. Lessen the assessment on
exertion, and more will be advertised. Less sources of info mean less aggregate yield.
Elements of generation are to a great extent correlative to each other. A greater
amount of one variable of generation supports the profitability and pay of alternate
elements. To a lesser extent a component constrains the efficiency and salary of the
various elements.
The expense predispositions against sparing and venture and steeply graduated
assessment rates were presented with the end goal of enhancing "social value". In
decades past, it was accepted that the additional layers of expense on salary utilized
for capital arrangement would do moderately minimal monetary harm, would burden
just the well off, and would give critical wage redistribution. It is getting to be
obvious, in any case, that the vast majority of the charges that appear to fall on the
individuals who supply physical capital, scholarly capital, or extraordinary gifts to the
creation procedure, may really be moved to common specialists and lower pay
retirees as decreased pre-assess and after-expense wages.
The unfavorable financial outcomes of non-unbiased tax assessment and graduated
expense rates , and the subsequent unfriendly effect on "social value", are not showed
in the purported "load tables" used to illuminate the general population strategy
wrangle about or the votes in Congress. With terrible data, the general population and
the Congress are left with an awful duty framework and an imperfect economy.

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