CONCEPT OF ELASTICITY
It is easy to say that the demand of an individual changes as the price increases or decreases. But what is important is to measure the degree of responsiveness of the changes in the demand for a product relative to change in price. This is called ELASTICITY. Elasticity is one of the most important concepts in neoclassical economic theory. It is useful in understanding the incidence of indirect taxation, marginal concepts as they relate to the theory of the firm and distribution of wealth and different types of goods as they relate to the theory of consumer choice. The quantity demanded of a good is affected mainly by
- Changes in the price of a good,
- Changes in price of other goods,
- Changes in income
- Changes in other relevant factors
Different elasticities of demand measures the responsiveness of quantity demanded to changes in variables Price elasticity of demand- measures the responsiveness of quantity demanded by changes in the price Of the good.
Income elasticity of demand – measures the responsiveness of quantity demanded by changes in Consumer incomes.
CONSUMER RESPONSE TO EVERY PRICE CHANGE CAN BE DESCRIBED IN THE DIFFERENT TYPES OF ELASTICITY. 1.
The value of less than one represents an inelastic demand.
Consumer’s response is less than the price change. If price increase is one percent, the demand of consumer decreases by less than one percent. Consumers have no capacity to decrease more his demand even if there is a price increase. This kind of consumer response shows that the product is necessary and there are no ready substitutes for products like, rice, sugar, the services of MERALCO for elasticity, Maynilad/Manila Water Corporation for water. 2.
The response of quantity demanded in every percent change in price is considered elastic when the value is more than one.
What does it mean? For every one percent change in price, quantity demanded will decrease by more than one...
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