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Elasticity

TermDefinition
Elasticity is a measure of responsiveness (sensitivity) of the quantity demanded of a good to a change in some variable.
Price Elasticity of Demand(PED) measures the percentage/proportionate change in quantity demanded of a good caused by the percentage/proportionate change in the price of a good itself
A good is Relatively Elastic when the proportionate/percentage change in quantity demanded of a good is greater than the proportionate/percentage change in the price of a good itself.
A good is Perfectly Elastic when any increase in the price of that good results in its quantity falling to zero.
A good is said to be Unitary Elastic when the proportionate/percentage change in the quantity demanded of a good is equal to the proportionate/percentage change in the price of that good.
A good is Relatively Inelastic if the proportionate/percentage change in quantity demanded of a good is less that the proportionate/percentage change in price of that good.
A good is Perfectly Inelastic if the proportionate/percentage change in the price of a good causes no change in the quantity demanded of that good.
For normal goods, PED is usually negative (-), i.e. As price increase (+), quantity demanded falls (-) and vica versa.
For giffen goods, PED is positive (+). This is because price and demand travel in the same direction, i.e. If price increases, the quantity demanded also increases and vica versa.
Factors affecting PED The availability of close substitutes,Complementary goods,Is the commodity a luxury or necessity?, The proportion of income that is spent of the commodity, The durability of the commodity, Expectations as to future changes in price, The length of time all
Importance of Understanding Elasticity Importance in taxation policy/minister for finance, Importance to business people, Use in International Trade.
Cross Elasticity of Demand(CED) measures the proportionate/percentage change in the quantity demanded for one good caused by the proportionate percentage change in the price of another good.
For substitute goods, CED is positive
For complementary goods, CED is negative
Income Elasticity of Demand(YED) measures the proportionate/percentage change in the quantity demanded for a good caused by the proportionate/percentage change in income (Y) of consumers.
For normal goods,YED is positive
For inferior goods,YED is negative
Price Elasticity of Supply(PES) measures the relationship between proportionate/percentage change in quantity supplied and proportionate change in price.
PES is usually positive, as an increase in its own price (+) will normally lead to an increase in the quantity supplied.
A good is elastic supply when the proportionate/percentage change in quantity supplied is greater that the proportionate change in price
A good is inelastic supply when a change in price of the good causes less than a proportionate change in quantity supplied of a good.
Factors that affect Elasticity of Supply: Firms capacity, Mobility of the factors of production, Time period, Nature of the product, Storage costs, Cost conditions, Products in joint supply, Stock.
Created by: deborahh
 

 



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