1. Define elasticity and give its importance.

Answer: Elasticity is a general concept used to quantify the response in one variable when another
variable changes. Elasticity is an economic concept used to measure the change in the aggregate
quantity demanded of a good or service in relation to price movements of that good or service. It is
important especially to the sellers of goods or services because it helps to indicate how much of a good
or service buyers consume when the price changes. When a product is elastic, a change in price quickly
results in a change in the quantity demanded. Example, if the price of the clothing increase, there is a
corresponding quantity effect, where fewer units are sold, and therefore reducing revenue. The lower
the price elasticity of demand, the less responsive the quantity demanded is given a change in price.

2.  Explain the types of elasticity.

- Price Elasticity of Demand

Answer: Price elasticity of demand is the ratio of the percentage change in quantity demanded of a
product to the percentage change in price. Economists employ it to understand how supply and demand
change when a product's price changes. A reduction in price does not increase demand much, and an
increase in price does not hurt demand either . Example, gasoline has little price elasticity of demand.
Drivers will continue to buy as much as they have to, as will airlines, the trucking industry, and nearly
every other buyer.

- Price Elasticity of Supply

Answer: Price elasticity of supply measures the responsiveness to the supply of a good or service after a
change in its market price. According to basic economic theory, the supply of a good will increase when
its price rises. Conversely, the supply of a good will decrease when its price decreases. A price elasticity
supply greater than 1 means supply is relatively elastic, where the quantity supplied changes by a larger
percentage than the price change. An example would be a product that's easy to make and distribute,
such as a fidget spinner.

- Cross Price Elasticity of Demand

Answer: Cross price elasticity of demand refers to the percentage change in the quantity demanded of a
given product due to the percentage change in the price of another "related" product. If all prices are
allowed to vary, the quantity demanded of product X is dependent not only on its own price (see
elasticity of demand) but upon the prices of other products as well.

- Income Elasticity of Demand

Answer: Income elasticity of demand is an economic measure of how responsive the quantity demand
for a good or service is to a change in income. A typical example of such a type of product is margarine,
which is much cheaper than butter. Furthermore, luxury goods are a type of normal good associated
with income elasticities of demand greater than one. Consumers will buy proportionately more of a
particular good compared to a percentage change in their income.

Source:
https://www.investopedia.com/terms/e/elasticity.asp

https://www.investopedia.com/terms/p/priceelasticity.asp
https://www.investopedia.com/ask/answers/040615/how-does-price-elasticity-affect-
supply.asp#:~:text=A%20price%20elasticity%20supply%20greater,such%20as%20a%20fidget
%20spinner.

https://stats.oecd.org/glossary/detail.asp?ID=3185

https://www.investopedia.com/terms/i/incomeelasticityofdemand.asp#:~:text=A%20typical
%20example%20of%20such,percentage%20change%20in%20their%20income.