Elasticity

Elasticity means responsiveness or sensitivity; Its

the ratio of the percent change in one variable to
the percent change in other variable; It is a tool
used by the economist to measure the reaction of a
function to the changes in parameters in a relative
way.
Demand Elasticity in particular is a measure of
the degree of responsiveness of quantity
demanded of a product to a given change in one of
the independent variables which affect demand for
that product

Elasticity
Income elasticity of Demand- is the
responsiveness of consumers demand to
a change in their income
Cross price elasticity of Demand- is the
responsiveness of demand for a certain good, in
relation to changes in price of other related
goods.
Demand for a product is said to be inelastic if
consumers will pay almost any price of the
product. While demand for a product maybe
elastic if consumers will only pay a certain price,
or a narrow range of prices, for a product.

Elasticity
Inelastic demand means that a producer seller can
raise prices without much hurting demand for its
product, and elastic demand means that a small
change in price results to a greater change in
quantity demanded.

The demand for a good is inelastic when the

change in quantity demanded is less than the
change in price. Thus, we can say that demand is
inelastic if computed elasticity coefficient is
less than 1.

Elasticity
Generally goods and services for which there are no
close substitutes are inelastic. Basic food items (e.g.
rice, pork, beef, fish, vegetables etc.), medicines (like
antibiotics) and oil products, are some examples of
goods that are elastic.
Goods that are vices like cigarettes are likewise
inelastic for a simple reason that those who smoke
cannot easily refrain from smoking so that even if the
price of cigarettes has been increasing, still
consumers consume them.

Inelastic demand

Elasticity
Conversely demand for a good is elastic if the
change in quantity demanded is greater than the
change in price. Demand is elastic if the
computed elasticity coefficient is greater
than 1.
In general goods and services that have many
substitutes which consumers may switch to are
elastic. Clothes, appliances, cars, among others,
are examples of goods that are elastic.

Elastic demand

Elasticity
At extremes demand can be perfectly price
inelastic , that is price changes have no effect have
no effect at all on quantity demanded. Even if price
will increase by more than one hundred percent , still
the amount of good that will be bought will be the
same. An example of good that may be perfectly
inelastic is a medicine for cancer patients.

Perfectly Price Inelastic Demand

Elasticity
On the otherhand, demand can be perfectly
price elastic that is any amount will be
demanded only at a prevailing price. However, if
the price will increase by even a miniscule
amount or a very large percentage , consumers
will not anymore purchase the good. An example
of a good that may be perfectly elastic is a trip
to the outer space.

Perfectly Price Elastic Demand

Elasticity
What determines elasticity?
a.) Ease of substitution
b.) Proportion of total expenditures
c.)Durability of product which may include
possibility of postponing purchase, possibility
of repair,

Elasticity
Income Elasticity of Demand-measures the
degree to which consumers respond to a change
in their incomes buy purchasing more or less of a
particular good.

Elasticity
In discussing income elasticity of demand, we
have to distinguish a normal good from an inferior
good.
A good is considered a normal good if a rise in
income brings an increase of a demand and a fall
income brings a decrease in demand. Most goods
are considered normal goods
On the other hand a good is an inferior good if a
rise in income brings a decrease in demand and a fall
in
income brings an increase of the demand.
In other words the consumption of other products
decreases (increases) as income increases
(decreases).

Elasticity
Cross price elasticity of demand
The cross price elasticity of demand measures the
responsiveness of demand to changes in the prices
of other goods, indicating how much more or less
of a particular product is purchased as other prices
change. The cross elasticity is defined as the
percentage change in quantity demand of one
good divide by the percentage change in the price
of a related good.

Elasticity
Estimates of cross elasticity of demand are
useful to retailers in their pricing decisions.
For example, when a grocery store cuts the
price of bread, the store will sell more bread
but will also sell more complementary goods
such as jelly, peanut butter, cheese, ham etc.

Elasticity
Elasticity of Supply
Supply Elasticity refers to the reaction or
response of the sellers or producers to price
changes of goods sold. In other words, it is a
measure of the degree of responsiveness of supply
to a given price. Moreover, it is the percentage
change in quantity supplied given a percentage
change in price.

Elasticity
Elastic supply- if a percentage change in price results
in a more than proportionate change in quantity
supplied is said to be price elastic.
Inelastic supply- If a change in price produces a less
than proportionate change in quantity supplied.
Perfectly inelastic supply- that is price changes
have no effect at all on quantity supplied
Perfectly elastic supply- that is any amount will be
supplied at the prevailing price.

Elastic supply

Inelastic supply

Perfectly Elastic SupplyPerfectly Inelastic supply