Supply and Demand and Price Elasticity

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  • Topic: Supply and demand, Externality, Alfred Marshall
  • Pages : 2 (480 words )
  • Download(s) : 699
  • Published : April 4, 2012
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(1) Identify who formalized the concept of elasticity and explain the concept.

The economist Alfred Marshall formalized the concept of elasticity; he introduced this concept in the law of supply and demand. The actual concept is a little confusing to me, what I get from the concept is that we use elasticity when we want to see how one thing changes when we change something else. How does demand for a good change when we change its price? How does the demand for a good change when the price of a substitute good changes?

Price Elasticity of Demand measures the rate of response of quantity demanded due to a price change. The Price Elasticity of Supply measures the rate of response of quantity demand due to a price change.

(2) a) Identify who gave us the concept of externalities and who formalized the concept.

Henry Sidgwick expressed ideas about spillover costs and benefits, but Arthur Pigou gets credit for formulizing the concept of externalities.

b) Explain thoroughly the concept of externalities.

Basically it means that the costs or benefits of goods or services are paid by someone else. Economists have in their arsenal of interpretive ideas the concept of externalities, by which they mean simply any “external” cost or benefit from that is not entirely borne by those responsible for it. “An externality arises when the cost borne by the decision maker do not include all of the costs of his decision. Some are inflicted on people who were not involved in the decision. There are social costs of production that are not accounted for in private cost calculation.” (Scott)

(3) Suppose production of this good imposes external costs of $10 for each unit produced. Does this cause an over or an underallocation of resources to production of this good? How might the government respond to correct this market failure?

This causes an over allocation of resources, when you move the supply curve to the left it shows the taxes on producers....
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