Paper Example on Elasticity in Economics

Introduction

Elasticity in economics is defined as a measured degree of responsiveness of one variable for example demand due to change in another variable such as price. The elasticity of demand and supply are the main ones addressed at large in economics. They both have been discussed below.

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Elasticity of Demand

This refers to the easiness with which demand responds to variability of other factors in the economy like prices and consumer income. It is calculated as the change in the quantity demanded divided by adjustment in either price or consumer income which is then converted to percent. (Pagoso 53-78) Price elasticity (PED) is the common type of demand elasticity which shows the effect of altering price on the behavior of consumers in term of quantity demanded. It gives the percentage change in demand as a result of one percent alteration in price. PED is almost always negative except on goods that do not obey the laws of demand such as Giffen goods which have a positive PED. Demand is more affected by price when PED is greater than 1, while it is relatively inelastic when the PED is less than 1. Revenue is however maximized when PED is exactly equal to 1.

Income elasticity of demand is also common which show how demand of a certain commodity is affected by the changes in income of a consumer. It`s a ratio of change in quantity demanded to the income divided by one hundred. It is mostly a positive value as opposed to PED. All values of elasticity are however considered in absolute terms although this may cause ambiguity. (Beverly 22)

Elasticity of Supply

This refers to the responsiveness of suppliers to changes own price of commodities. It is acquired as the modification in percent of quantity supplied over the change out of a hundred of the price.

The numerical form of PES is usually a positive value due to direct proportionally between supply and prices stated by the law of supply. An elasticity of less than one shows relative inelasticity, that which is greater than one shows relative elasticity. Responsiveness that is exactly equal to one is referred to as unitary. An elasticity of zero, therefore, shows perfect inelasticity implying there is variation in supply due to change in price, in other words, the supply is fixed.

Price elasticity of supply (PES) is affected by factors such as time, size of the firm, marginal cost, the mobility of factors of production and capacity of maximum production. Production increases with time which makes supply surpass price hence relative elasticity. The larger the firm the more the production or if the firm has a large capacity for producing without increasing the cost of production there is relative PES. (Press 442)Holding price constant supply may be responsive to changes in other variables such as the cost of production or marginal cost, technological changes and labor changes except in the case of perfect inelasticity. Cost of production is indirectly proportional to changes in supply while the quantity supplied is directly proportional to improvement in technology and increase in labor up to a certain point.(Tewari 39-60)Conclusion

Consumers and producers, therefore, respond to changes in price and other variables differently hence causing different levels of responsiveness.

Works Cited

Pagoso, Cristobal. Dinio, Rosemary. Villasis, George. Intoductory Microeconomics. Rex Bookstore Inc, 1997.

Tewari, Singh,Katar. Principles Of Microeconomics. New Age International Ltd, 2003.

Beverly, Jeniffer. Lempiere, Tony. Economic Theory. canada: natural resources, 1996.

Press, Salem. Economics Basics. SalemPress Inc, 1999.