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Concepts of Elasticity

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Concepts Of Elasticity

In economics, elasticity is a measure of the response or sensitivity of one economic variable against change in another.
Different elasticities of demand measure the responsiveness of quantity demanded to changes in variables which affect demand.
i) Price elasticity of demand - Measures the responsiveness of quantity demanded by changes in the price of the good. This is the most common elasticity measurement.
The formula used to determine price elasticity is e = (percentage change in quantity) / (percentage change in price)
Demand is inelastic if the coefficient is less than one. Example a large increase/decrease in price produces a small decrease/increase in sales.
Demand is elastic if the elasticity coefficient is greater than one. Example a small increase/decrease in price produces a large decrease/increase in sales.

ii) Income elasticity of demand - Measures the responsiveness of quantity demanded by changes in consumer incomes.
A product is a normal good when its income elasticity is positive (greater than zero)
A product is inferior good when its income elasticity is negative.

iii) Cross-price elasticity of demand - Measures the responsiveness of quantity demanded by changes in the price of another good.
If two goods are substitutes their cross-price elasticity will be positive.
If two goods are complements their cross-price elasticity will be negative.
The above measures are all with respect to buyers. Likewise we can measure how responsive sellers are using price elasticity of supply.
Price elasticity of supply - Measures the responsiveness of quantity supplied to changes in price.
A good example of supply being inelastic is this. Week prior to Valentine's day the prices of long stemmed roses go up. There is not a considerable increase in supply as it is too costly to increase production just in time for

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