Cherry Amor S.

Peas BSCoE-5
1. Expalin the relevance of the concept of elasticity to our daily livin an to !usiness
firms.
IMPORTANCE OF ELASTICITY IN OUR TODAYS LIFE
There is much more importance o the concept o e!asticit" in our !ie# The irm $hich uses
a%&ertisin' to chan'e prices uses the concept o e!asticit" o %eman% o its pro%uct# Most!" irms
set the prices o their pro%uct (" &ie$in' at the e!asticit" o %eman% o their pro%uct# The
'o&ernment co!!ects re&enues (" imposin' ta)es# The 'oo% ta) impose% (" the 'o&ernment on
the pro%ucts is one or $hich either %eman% is ine!astic or the supp!" is ine!astic# So i the
'o&ernment $ants to put ta) (ur%en on the consumers then it $i!! choose the pro%uct to ta) $ith
!o$ price e!asticit" o %eman%# An% i 'o&ernment $ants to pane!i*e the pro%ucers then it must
choose the pro%uct $ith !o$ price e!asticit" o supp!"#
". Expalin the different classification of the price elasticity of demand and supply.
Classification of the Price Elasticity of #emands
E$AS%&C #E'A(# + a chan'e in price, resu!ts in a 'reater than proportiona! chan'e in the
-uantit" %eman%e% ED./#
&(E$AS%&C #E'A(# + a chan'e in price resu!ts in a !ess than proportiona! chan'e ED0/#
)(&%A*+ #E'A(# + a chan'e in price resu!ts in n e-ua! proportiona! chan'e ED1/#
PE*,EC%$+ E$AS%&C #E'A(# + %eman% chan'es e&en $hen price remains unchan'e%#
PE*,EC%$+ &(E$AS%&C #E'A(# + chan'e in price %oes not resu!t in an" chan'e#
Price Elasticity of #emand
This measures the re!ati&e amount (" $hich the -uantit" %eman%e% $i!! chan'e in response to
chan'e in the price o a particu!ar 'oo%# The e-uation is2
For ca!cu!ations the !on'er orm is sometimes more useu!# This is ca!!e% the mi%+point metho%
an% the one "ou3!! nee% to 4no$ or 5ursar"#
-inds of Elasticity of Supply.
There are i&e t"pes o e!asticit" o supp!" $hich are 'i&en (e!o$
/&0 Perfectly Elastic Supply.
It is a case $here a &er" s!i'ht chan'e in price causes an Ininite chan'e in supp!"# A s!i'ht a!! in
prices (rin's -uantit" supp!ie% to *ero# In such a case the supp!" cur&e runs para!!e! to 6 +a)is#
The supp!" cur&e ta4es the shape o a hori*onta! strai'ht !it !ine# In the %ia'ram 'i&en (e!o$ 3SS3
is the supp!" cur&e $hich sho$s that an ininitesima!!" sma!! chan'e in price causes an ininite!"
!ar'e chan'e in the -uantit" supp!ie%#
/"0 Perfectly inelastic supply.
The supp!" o a commo%it" is sai% to (e perect!" ine!astic $hen the supp!" o commo%it" is
comp!ete!" non+responsi&e to chan'es in price# It is a case $here -uantit" supp!ie% remains the
same %espite the chan'e in price# A perect!" ine!astic supp!" cur&e is a &ertica! strai'ht !ine
$hich is para!!e! to OY+a)is# In the %ia'ram 'i&en (e!o$ 3SS3 is the perect!" ine!astic supp!"
cur&e that runs para!!e! to OY+a)is#
/10 *elatively elastic supply.
The supp!" is re!ati&e!" e!astic $hen a 'i&en chan'e in price pro%uces more than proportionate
chan'e in -uantit" supp!ie%# A %ou(!in' in price $i!! resu!t in more than %ou(!e the -uantit"
supp!ie%# In the %ia'ram sho$n (e!o$, a 'i&en chan'e in price rom OP to OP, is atten%e% (" a
much more chan'e in supp!", supp!" cur&e 3SS3 is re!ati&e!"
/20 *elatively inelastic supply.
7hen a certain chan'e in price causes a sma!!er proportionate chan'e in -uantit" supp!ie% o a
Commo%it", the supp!" is sai% to (e re!ati&e!" !ess e!astic# The percenta'e chan'e in price is
more than the percenta'e chan'e in -uantit" supp!ie%# In the %ia'ram as sho$n, (e!o$ a rise in
price rom OP, to OP (rin's a(out !ess than proportionate chan'e in supp!" rom OS, to OS#
8ence the supp!" cur&e SS is re!ati&e!" ine!astic#
/50 )nitary elastic supply.
In such a situation the proportionate chan'e in supp!" e-ua!s the proportionate chan'e in price#
In the %ia'ram 'i&en (e!o$ SS is the unitar" e!astic supp!" cur&e# Increase in price rom OP to
OP is accompanie% (" a proportionate chan'e in supp!" rom OS to OS#
1. #ifferentiate !et3een point elasticity and arc elasticity and the formula for each.
Point e!asticit" $i!! not "ie!% uni-ue resu!t e&en on the same cur&e#The ca!cu!ation o the
percenta'e chan'e can (e %ierent#The ormu!a is 9chan'e in -uantit":9chan'e in price#
The arc e!asticit" use the a&era'e &a!ue to ca!cu!ate the percenta'e chan'e#It is more
accurate#The ormu!a is ;P/<P=>:;?/<?=> ) chan'e in ?:chan'e in P#
The arc e!asticit" is use% $hen a unction or the entire %eman% cur&e is not 4no$n, or not
a&ai!a(!e e)presse% as a unction o price an% -uantit"# the arc is @ust a section o the cur&e
(et$een t$o points $here $e can compute the shape o the cur&e
2. State the determinants of price elasticity of demand and supply
#eterminants of Price Elasticity of #emand4
A num!er of factors determine the elasticity.
A Su(stitutes2 The more su(stitutes, the hi'her the e!asticit", as peop!e can easi!" s$itch rom one
'oo% to another i a minor price chan'e is ma%e
A Percenta'e o income2 The hi'her the percenta'e that the pro%uct3s price is o the consumers
income, the hi'her the e!asticit", as peop!e $i!! (e careu! $ith purchasin' the 'oo%s (ecause o
its cost
A Necessit"2 The more necessar" a 'oo%s is, the !o$er the e!asticit", as peop!e $i!! (u" it no
matter the price, such as insu!in
A Duration2 The !on'er a price chan'e ho!%s, the hi'her the e!asticit", as more an% more peop!e
$i!! stop %eman%in' the 'oo%s ;i#e# i "ou 'o to the supermar4et an% in% that (!ue(erries ha&e
%ou(!e% in price, "ou3!! (u" it (ecause "ou nee% it this time, (ut ne)t time "ou $on3t, un!ess the
price %rops (ac4 %o$n a'ain>
A 5rea%th o %einition2 The (roa%er the %einition, the !o$er the e!asticit"# For e)amp!e,
Compan" 63s rie% %ump!in's $i!! ha&e a re!ati&e!" hi'h e!asticit", $here as oo% in 'enera! $i!!
ha&e an e)treme!" !o$ e!asticit" ;see Su(stitutes, Necessit" a(o&e>
#eterminatnts of Price Elasticity of SupplyB
The %eterminants o the price e!asticit" o supp!" are2 The e)istence o the natura!!" occurrin'
ra$ materia!s nee%e% or pro%uctionB the !en'th o the pro%uction processB the pro%uction spare
capacit" ;the more spare capacit" there is in an in%ustr" the easier it shou!% (e to increase output
i the price 'oes up>B the time perio% an% the actor immo(i!it" ;the ease o resources to mo&e
into the in%ustr">B the stora'e capacit" o the merchants ;i the" ha&e more 'oo%s in stoc4 the"
$i!! (e a(!e to respon% to a chan'e in price more -uic4!">B