Paragraph About Elasticity and Inelasticity

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 2 (509 words) Published: November 25, 2012
Elasticity is the degree to which demand for a service or a good varies from its price. What happens most of the times is that when there are price decreases, sales increase and viceversa. This is known as elastic demand. For example, bicycles, sodas, jeans, cars have elastic demand because when they are cheap everyone wants to buy them, but when the price increases, people stop doing so (demand depends on the price). This happens with products such as this because they are not totally essential on people´s lifes (one can live without it); instead of gas (which is a product classified in inelastic demand) because people will always need it. Elasticity is important because it helps organizations decide on the best course of action regarding the service or the product. Also, it helps the government impose a new tax (when a new tax is imposed, the prices rise). If the demand is very elastic it will considerably fall when the price has risen and the government will not be able to earn expected revenue. Affects monopoly as well, If demand is very elastic, the effect of monopoly on prices is quite limited. In contrast, if the demand is relatively inelastic, monopolies will increase prices by a large margin. Hence, elasticity helps both companies and government understand is what is being done produces results or not. In order to measure the rate of response of quality demanded due to a price change, there is the Price Elasticity of Demand (PEoD): (% change in quality demanded)/(% change in price). Factors that can influence this calculation include costs of switching between products, and the importance of the good (is it necessary?). Moreover, we have what is known as price elasticity of supply, measuring the relationship between change in quality supplied and a change in price. The formula for calculating: is (%change in quality supplied)/(%change in price). There are also factors that can influence this calculation, such as spare capacity, stocks, time periods, etc....
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