B.

sc Sem-1 Examination 2023 (Under CCF)

( Tutorial exam of microeconomics - 1 )

# SUBJECT ECOM Course DSCC - 1

TOPIC : Elasticity's different types and
factor affecting elasticity's .
NAME : Taniska Shaw
CU. Roll no. : 233613-11-0036
CU Reg. No. : 613-1211-0384-23
College Roll no. : SC2309177
 Introduction To Elasticity
Elasticity is a fundamental concept in economics that measures the responsiveness of one economic variable to a
change in another. It helps us understand how consumers and producers react to changes in prices, income, and
other factors. Elasticity is crucial in understanding market behavior, pricing strategies, and consumer preferences,
as it helps predict how changes in factors like price or income will affect the market equilibrium and overall welfare
.
There are two main types of elasticity:
1. Demand Elasticity:
 Measures how much the quantity of a good or service
demanded changes in response to a change in its price.
 Elastic demand: When a small change in price leads to a
large change in quantity demanded. Inelastic demand: When
a large change in price leads to a small change in quantity
demanded.
2. Supply Elasticity:
 Measures how much the quantity of a good or service
supplied changes in response to a change in its price.
 Elastic supply: When a small change in price leads to a large
change in quantity supplied. Inelastic supply: When a large
change in price leads to a small change in quantity supplied.
Price elasticity of demand :
Price elasticity of demand is a measurement of the change in the consumption of a product in
relation to a change in its price. It is the ratio of the percentage change in quantity demanded of a
product to the percentage change in price .

Income elasticity of demand :

Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to
a change in the real income of consumers who buy this good .

Cross-Price elasticity of demand :

The cross elasticity of demand is an economic concept that measures the responsiveness in the
quantity demanded of one good when the price for another good changes. Also called cross-price
elasticity of demand, this measurement is calculated by taking the percentage change in the
quantity demanded of one good and dividing it by the percentage change in the price of the other
good.
Types of Elasticity
1. Linear Elasticity:
•Definition: The simplest form, where stress and strain are directly proportional within a specific limit. Imagine stretching a spring; the more you stretch it
(stress), the longer it gets (strain), but in a predictable and reversible way.
•Key Features:
• Stress-strain curve is a straight line within the elastic region.
• Most common type of elasticity observed in engineering materials like metals.
2. Non-linear Elasticity:
•Definition: Beyond the elastic limit, the relationship between stress and strain deviates from linearity. The material might deform more significantly for
smaller increases in stress.
•Key Features:
• Stress-strain curve bends and deviates from linearity beyond the elastic limit.
• Some materials like elastomers (e.g., rubber) exhibit significant non-linear elasticity.
3. Viscoelasticity:
•Definition: Combines both elastic and viscous behavior. Materials exhibit time-dependent response to stress, slowly deforming and recovering over time.
•Key Features:
• Polymers, foams, and biological tissues often exhibit viscoelasticity.
• Applications in shock absorption, damping vibrations, and pressure seals.
4. Hyperelasticity:
•Definition: A special type of non-linear elasticity observed in rubber-like materials. At high strains, the stress increases more rapidly than the strain,
providing high energy storage capacity.
•Key Features:
• Stress-strain curve shows a steeper rise beyond the initial linear region.
• Important for understanding the behavior of rubber seals, tires, and other elastomeric components.
5. Auxetic Materials:
•Definition: A rare type of material that exhibits negative Poisson's ratio, meaning it expands in width when stretched and contracts in width when
compressed.
•Key Features:
• Offers unique mechanical properties like shock absorption and energy dissipation.
• Still under research and development, but potential applications in biomimetics and metamaterials.
Importance of Elasticity
For businesses:
•Pricing strategy: Understanding how price changes affect demand allows businesses to set optimal prices that maximize profits or achieve specific marketing
objectives. They can use different pricing strategies like skimming or penetration pricing depending on the elasticity of their product.
•Inventory management: Knowing how demand reacts to price fluctuations allows businesses to better manage inventory levels and avoid stockouts or
overstocking, thus optimizing their costs and operational efficiency.
For consumers:
•Informed purchase decisions: Understanding the elasticity of different products allows consumers to make informed choices based on their budget and
needs. They can identify situations where substitutes offer better value or where price changes might be temporary, influencing their buying decisions.
•Market awareness: By being aware of the general price elasticity of various products, consumers can better anticipate potential price fluctuations and adjust
their spending habits accordingly.
For policymakers:
•Taxation: Governments can use PED to design effective tax policies that achieve desired economic outcomes. For example, taxing products with inelastic
demand might generate more revenue than taxing elastic goods.
•Market regulations: Understanding how price changes impact demand helps policymakers evaluate the potential effects of regulations on different sectors and
consumer welfare.
•Price controls: Analyzing PED is crucial when implementing price controls to assess their effectiveness and potential unintended consequences on markets
and consumer behavior.

Beyond price elasticity:

The concept of elasticity extends beyond price and applies to various other factors. Understanding how different variables interact and affect a system's
behavior is crucial in various fields like engineering, physics, economics, and even social sciences. By analyzing the "elasticity" of different systems, we can
make better predictions, optimize performance, and develop effective strategies for diverse applications.
Elasticity of supply :
The elasticity of supply is a measure of how quickly a company, producer, or industry
responds to changes in the demand for its product or services. It is also known as supply
elasticity.
Factors Affecting Elasticity - 1
Product-related factors:
 Availability of substitutes: The more readily available and close substitutes a product has, the higher its price elasticity. If
a price increase makes your product significantly more expensive than alternatives, customers can easily switch. For
example, the demand for bottled water is more elastic than for gasoline, since there are more readily available substitutes
like tap water or other beverages.
 Necessity vs. luxury: Essential goods like food and medicine tend to have lower elasticity as people need them
regardless of price, while luxury items like jewelry or high-end electronics are more elastic due to increased sensitivity
to price changes.
 Stage in the product lifecycle: New or innovative products might have less elastic demand initially as consumers are
willing to pay a premium for novelty. Established products with mature markets often have higher elasticity as
consumers have more alternatives and price sensitivity increases.

Consumer-related factors:
 Income level and spending habits: Consumers with higher disposable income are generally less sensitive to price
changes, leading to lower elasticity for luxury goods they desire. Conversely, price elasticity will be higher for essential
goods, especially for lower-income consumers with tighter budgets.
 Frequency of purchase: The more frequently a consumer purchases a product, the more likely they are to be sensitive to
price changes and seek alternatives, increasing elasticity. Infrequent purchases for special occasions or essential items
might have lower elasticity.
 Information and awareness: Consumers with better information about alternative products, price comparisons, and
market trends are more likely to be price-sensitive and exhibit higher elasticity in their purchase decisions.
Factors Affecting Elasticity - 2
1. Characteristics of the Good or Service:
1.Necessity vs. Luxury: Essential goods like food and medicine have lower elasticity. People need them regardless of price, though even
these can have some elasticity in the long run. Conversely, luxury goods like jewelry have higher elasticity, as consumers are more willing
to substitute or forgo them when prices rise.
2.Availability of Substitutes: If close substitutes readily exist, demand is more elastic. For instance, bottled water becomes more elastic if
tap water is readily available or other beverages are similar in price.
3.Brand Loyalty: Strong brand loyalty can make demand less elastic, as consumers are willing to pay more for specific features or brand
recognition.
2. Consumer Characteristics:
4.Income Level: Consumers with higher income are generally less sensitive to price changes, leading to lower elasticity for luxury
goods. Lower-income consumers with tighter budgets exhibit higher elasticity, especially for essential goods.
5.Frequency of Purchase: The more frequently a product is purchased, the more likely consumers are to be price-
sensitive, increasing elasticity. Infrequent purchases for special occasions might have lower elasticity.
6.Habit and Addiction: For addictive products or ingrained habits, demand can be relatively inelastic in the short term, but elasticity might
increase long-term as people find substitutes or adjust their habits.
7.Information and Awareness: Consumers with better information about alternatives, price comparisons, and market trends are more likely
to be price-sensitive and exhibit higher elasticity.
3. Market Conditions:
8.Time Horizon: In the short term, demand is often less elastic as people have limited ability to adjust their consumption habits. In the long
term, elasticity increases as people find substitutes or adjust their budget.
9.Government Policies: Price controls or taxes can artificially affect elasticity by limiting price movements or increasing costs.
10.Economic Climate: During economic downturns, consumers become more price-sensitive, increasing elasticity for most goods and
services.
 Conclusion
The concept of elasticity of demand plays a critical role in economics. The measurement of
elasticity of demand is crucial in determining the impact of changes in price, income, and
other factors on the quantity demanded of a good or service .Accurately measuring factors
affecting elasticity of demand requires a thorough understanding of the underlying factors
that influence consumer behaviour . Economists and researchers use various methods to
calculate the degree of elasticity, including the midpoint and arc elasticity formulas.