Homework Question on The Concept of Elasticity
- Explain The Concept of Elasticity
Homework Answer on The Concept of Elasticity
When business decision makers want to measure the responsiveness of consumers due to change in prices, they exercise the concept of elasticity. If a business owner wants to measure changes that occur in quantity demand due to percentage change in price, the law of demand cannot measure such change. Hence, a concept of elasticity is required to show a responsive measure; it is a unit-free measure that demonstrates the responsiveness of a certain variable due to a change in another variable that is related to it (Sivagnanam and Srinivasan 50).
Examples of elasticity include price elasticity, income/revenue elasticity, and cross elasticity. Responsive changes are measured using percentages, and thus, price elasticity of demand can be calculated by dividing percentage variation in demand of a product by the percentage change in price of that product. Different types of goods or services possess different types of demand elasticity. They may have elastic, inelastic, or unitary type of demand elasticity.
The concept of elasticity is generally utilized in making decision by both private entities and government. Elasticity enables economists to quantify variation in markets without necessarily standardizing the units of measurements. Areas that utilize elasticity of demand theory include taxation, wage determination, price discrimination, international trade, and business decision making. For instance, in international trade, governments set terms of foreign trades, such as tariffs and terms of trade through elasticity (Sivagnanam and Srinivasan 59). Some industries utilize income elasticity of demand to check their advancement, as well as future consumption patterns.