On the other hand are highly elastic products. There can be various examples of goods that fall in this category. For example, the demand for refrigerators go high during festive seasons as the prices are slashed and people wait for it. As mentioned above in the blog, there are mainly two types of elasticity- Elasticity of Demand and Elasticity of Supply. Elasticity of demand is an economic measure of the sensitivity of demand relative to a change in another variable.
The demand for a good or service depends on multiple factors such as price, income, and preference. Whenever there is a change in any of these variables it causes a change in the quantity demanded of the good or service. Price Elasticity of Demand or PED measures the responsiveness of quantity demanded to a change in price.
There are two ways to measure PED- arc elasticity that measures over a price range, and point elasticity that measures at one point. Cross Elasticity of Demand XED is an economic concept that measures the responsiveness in the quantity demanded of one good when the price of other goods changes. Also called cross-price elasticity of demand, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of the other good.
Income Elasticity of Demand measures the responsiveness in the quantity demanded for a good or service when the real income of the consumers is changed, keeping all the other variables constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income.
This concept helps us to find whether a good is a necessity or luxury. Price Elasticity of supply PES measures the responsiveness to the supply of a good or service after a change in its market price. Some basic economic theories explain that when there is a fall in the price of a good its supply is also decreased and when the prices are on a rise the supply is increased. So, these were the four different types of elasticity that measure responsiveness of two main economic variables, demand and supply, when other market variables are changed.
In general, we can say that the more good substitutes are there, the more elastic demand will be. This can be understood by an example. The consumers are likely to switch to another company or they may even replace their cup of coffee with a cup of strong tea.
This means that the cup of coffee is an elastic good as a small increase in the price is resulting in a large decrease in the demand. Another example could be of caffeine. Let us say that the price of caffeine goes up. But this time the consumers will not switch to another beverage or drink as there are very few good substitutes for caffeine.
So, most people may not willingly give up their cup of caffeine. This means that caffeine is an inelastic product. These two examples also tell us that there may be an elastic product within an industry while the industry is inelastic. This is not a mystery at all. We all need a few things for survival and we can not give up on them.
These products that we require for survival are termed as necessity products. For example, rice grains. A large part of the Indian population is a daily consumer of rice grains. This makes the good inelastic. The third influential factor is time. We consume some goods as we are addicted to them. Two of the most popular examples are alcohol and tobacco.
We will understand the role of time with an example. Suppose the government increases the taxes on tobacco which leads to an increase in the prices.
This makes the product inelastic. An inelastic supplier one with a steeper supply curve will always supply the same amount of goods, regardless of the price, and an elastic supplier one with a flatter supply curve will change quantity supplied in response to changes in price. As we have noted, elasticity can be roughly compared by looking at the relative steepness or flatness of a supply or demand curve.
Thus, it makes sense that the formula for calculating elasticity is similar to the formula used for calculating slope. Instead of relating the actual prices and quantities of goods, however, elasticity shows the relationship between changes in price and quantity. That is, even when an increase in price is paired with a decrease in quantity as with most demand curves , the elasticity will be positive; remember to drop any minus signs when finding your final value for elasticity.
Let's apply this and solve for elasticity in the market for ping pong balls. SparkTeach Teacher's Handbook. Summary Elasticity. Page 1 Page 2 Page 3. What is Elasticity? How Is Elasticity Measured? Personal Finance. Your Practice. Popular Courses. Business Business Essentials. Business Essentials Guide to Mergers and Acquisitions. Table of Contents Expand. What Is Elasticity?
How Elasticity Works. Types of Elasticity. Factors Affecting Demand Elasticity. The Importance of Price Elasticity. Examples of Elasticity.
Elasticity FAQs. The Bottom Line. Key Takeaways Elasticity is an economic measure of how sensitive an economic factor is to another, for example, changes in supply or demand to the change in price, or changes in demand to changes in income. If demand for a good or service is relatively static even when the price changes, demand is said to be inelastic, and its coefficient of elasticity is less than 1. Examples of elastic goods include clothing or electronics, while inelastic goods are items like food and prescription drugs.
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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Understanding the Cross Elasticity of Demand The cross elasticity of demand measures the responsiveness in the quantity demanded of one good when the price changes for another good. What Is Income Elasticity of Demand?
Income elasticity of demand measures the relationship between a change in the quantity demanded for a particular good and a change in real income. Total Revenue Test Definition A total revenue test approximates price elasticity of demand by measuring the change in total revenue from a change in the price of a product or service. What Does Inelastic Mean? Inelastic is a term used to describe the unchanging quantity of a good or service when its price changes. Price Elasticity of Demand Price elasticity of demand is a measure of the change in the quantity purchased of a product in relation to a change in its price.
Understanding the Law of Supply and Demand The law of supply and demand explains the interaction between the supply of and demand for a resource, and the effect on its price. Partner Links. Related Articles. Microeconomics Elasticity vs. Inelasticity of Demand: What's the Difference? Microeconomics What are some examples of demand elasticity other than price elasticity of demand?
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