It is very important in a lot of situations to understand not only qualitatively but alsoquantitatively how responsive quantities such as demand and supply are to things like price,income, the price of related goods, and so on. For example, when the price of gasoline increasesby 1%, does the demand for gasoline go down by a little or a lot? Answering these sorts ofquestions is extremely important to economic and policy decision making, so economists havedeveloped the concept of elasticity to measure the responsiveness of economic quantities.Elasticity is the degree of responsiveness in Supply or Demand in relation to changes in price.Elasticity can take a number of different forms, depending on what cause and effectrelationship economists are trying to measure. There are four types of elasticity which is Priceelasticity of demand, Income elasticity, Cross Price elasticity of demand and Price elasticity ofsupply. Price elasticity of demand, for example, measures the responsiveness of demand tochanges in price. Income elasticity of demand measures the responsiveness of demand tochanges in income, Cross price elasticity of demand measures the responsiveness of the quantitydemanded for a good to a change in the price of another good. Price elasticity of supply, incontrast, measures the responsiveness of quantity supplied to changes in price.

Elasticity can berelated to our lives because it is an important concept that can be apply in the daily ofhouseholds, lives business and researches.22.0 TOPICPrice elasticity of demandEvery day we buy many things from clothing, toys, and electronics to things we really needlike food and health care. Before buying anything we should ask ourselves this question; is itreally worth it? If we think so then we will buy it, if not we will pass, but if we really need it wewill pay any price for it. Economist call this price elasticity of demand, price elasticity ofdemand measures the responsiveness of the quantity demanded of a good when the price of thatgood changes. Price elasticity of demand is a term in economics often used when discussingprice sensitivity.

The formula for calculating price elasticity of demand is the percentage changes in quantitydemanded divided by a percentage changes in price. For example, if the quantity demanded for agood increase 10% in response to a 7% decrease in price, the price elasticity of demand would be10% / 7% = 1.3; which is inelastic (E<1).

What this means is that the consumer did not respondmuch or is not really sensitive to the increase of the price. There are five types of price elasticityof demand which is elastic (E>1), inelastic (E>1), Unit Elastic (E=1), perfectly inelastic (E=0),and perfectly elastic (E=?). For elastic, the consumer responds a lot or is very sensitive to thechange of price. Unit elasticity is if the quantity demanded for a good increase 10% in responseto a 10% decrease in price.

Perfectly inelastic customer will buy a good or service regardless ofthe movement of price. Perfectly elastic is even a small change in price will cause an infinitychange in quantity demand.Elasticity ofDemand andSupplyPrice elasticity ofdemandIncome elasticityod demandCross priceelasticity ofdemandPrice elasticity ofsupply3The degree to which the quantity demanded for a good change in response to a change inprice can be influenced by a number of factors. Factors include the availability of substitutes,necessities VS luxuries, market, proportion of expenditure, and time horizon. When severalsubstitutes are available, consumers can easily switch from one good to another even if there isonly a small change in price. Conversely, if no substitutes are available, demand for a good ismore likely to be inelastic.

Necessities tend to have inelastic demand and luxuries tend to haveelastic demand. For example when the price of a visit to the doctor rises, people will notdramatically alter the number of times they go to the doctor, although they might go somewhatless often. By contrast, when the price of sailboats rises, the quantity of sailboats demanded fallssubstantially. The reason is that most people view doctor visits as a necessity and sailboats as aluxury.

Narrow markets tend to be elastic than broad markets, because narrow market has fewersubstitutes and broad market has more substitutes. For proportion of expenditure higher incomegroup; demand may be more inelastic for most goods, Lower income group; demand may bemore elastic for goods. Time horizon in most cases demand is more elastic in the long run ascompared to the short run.Income elasticity of demandIncome elasticity of demand is one of the subtopic of Elasticity. This subtopic is basicallyabout how the income of the consumers will determines the demand of a product or services. Ineconomics, income elasticity of demand measures the responsiveness of the quantity demandedfor a good or services to a change in income of the consumers demanding the goods. Incomeelasticity can help people to classify goods such luxury goods, inferior goods, necessary goodsand normal goods.

It also can help sellers to predict market potential of a goods or services tothe market. It can predict whether the demand of the product or services increase or decrease.The way to measure income elasticity of demand is the percentage change in quantity demandeddivided by the percentage change in income.4When it is relatively elastic (E>1), the demand of the goods or services are responsive tothe change in income.

This means that, the demand of the goods and services are really sensitiveto the change of consumer’s income. The biggest example will be airfare. If the consumers can’tafford the airfare, the demand of airfare will decrease. People will tend to choose other kinds oftransportation to go to their destination or people will just wait for the price of the airfare todecrease. If is it relatively inelastic (0

Lastly willbe Unit elastic (E=0), which the demand of the goods or services changes proportionally to thechange of income. The demand of the goods or service won’t have any much of the differenceeven though the price of it increases marginally.In this topic, there are four kinds of degrees. The first degree will be negative incomeelasticity of demand. The goods that fall under this category are inferior goods. The increase inincome may lead to a fall of demand and lead to change to more luxuries substitute.

The exampleof it will be bicycle. If the consumer’s income is increasing, people tend to buy cars instead ofbicycle as their mode of transportation. The second will be income inelastic. The goods that arein this category are normal goods. The increase in income may lead to a rise in demand. Thethird will be income elastic. This will be luxury goods. This is when the elasticity of demand isgreater than 1.

The fourth will be perfectly inelastic. If the elasticity of demand is equal to zero,it will be perfectly inelastic which all the necessary goods are.The factors that will affect the income elasticity of demand are the level of income of theconsumers, the level of satisfaction of the consumers, and either the goods or services are luxuryor just necessities for the consumers. If the income of the consumer is lower compare to otherconsumers, he or she will think that it is a luxury. But other consumers will think that it is just anecessity in their daily life. Some people might think that buying expensive stuff is just asatisfaction. Even their level of income are not suitable for them to buy those stuff, they will stillbuy it.

5Cross price elasticity of demandIn the cross price elasticity of demand, there are three types of goods which are needed to bedifferentiating through the above topic. That is, complimentary goods, substitute goods, and nonerelated goods. The formula for cross price elasticity is the percentage change in quantitydemanded of good 1 divided by the percentage change in the price of good 2. By using theformula that I’ve shown, you may have seen this three types of goods that I’ve told you about.The complimentary, substitute, and none related goods.

Firstly, complementary good or complement good is goods with a negative cross elasticity ofdemand, in contrast to asubstitute good. This means a good’s demand is increased when theprice of another good is decreased. Conversely, the demand for a good is decreased when theprice of another good is increased.

When two goods are complements, they experiencejointdemand. For example, the demand for popcorns may depend upon the number of cinema ticketssold; this is why cinema tickets have sometimes been sold as loss leaders, to increase demand forthe popcorns. To determine the goods of popcorns and cinema tickets if they are complementarygoods, is by using the formula above and calculate the changes in price and changes in demand.From that if the answer is lesser than 0, it will be prove to be a complementary goods.Secondly, substitute good is a good that can be replaced. From my understanding of substitutegood, there are products that a consumer perceives as similar or comparable, so that having moreof one product makes them desire less of the other product. For example, Coca-Cola is asubstitute of Pepsi.

If price of either one substitute good went up, the other substitute good’sdemand would be increase. There are different degrees of substitutability. For example, Pepsiand Coca-Cola may substitute to some extent; if the price of the ingredients increasesconsiderably, one may expect that some people will switch to Coca-Cola. The reason that onegood is substitutable for another has immediate economic consequences; insofar as one good canbe substituted for another, the demands for the two kinds of good will be interrelated by the factthat customers can trade off one good for the other if it becomes advantageous to do so.6Lastly, for none related good or I would say it as dissimilar good; are goods that havedifferent similarity, uses, or functions.

For example, potato chips are snacks that we munch andtable that we are uses to put something on it. Changes in the price of one good will have noeffect onthe demand for anindependent good. Thus, none related goods areneither complements nor substitutes.Price elasticity of supplyPrice Elasticity of Supply is regarded as a measurement of how much the quantity supplied ofa good responds to a change in price of that good. In simpler terms it is also, a ratio between %change of the quantity supplied and the % change of price of an product. The ratio would looklike this P:E with (P) being price and (E) being elasticity. This means for every 1 increase inratio of price, there will be an (E) increase in quantity supplied.

There are also several types of elasticity states. For instance if the elasticity is E>1then the supply is regarded as elastic. Which forms a almost flat line plotted on the graph. If theelasticity is E<1 then the supply is regarded as inelastic. This forms a steep line on the graphwhen plotted. If the elasticity is E=1 then the supply is regarded as unit elastic. This forms adirectly proportional graph.

If the elasticity is E=0 then the supply is regarded as perfectlyinelastic. This forms a straight vertical line on the X-axis in the graph. If the elasticity is E=?then the supply is perfectly elastic.

This forms a straight horizontal line on the y-axis of thegraph.There are certain factors that affect the Price Elasticity of Supply. The first one beingthe rate of increase in production costs. If the rate of increase in production costs of a goods ishigh, then the supply will be inelastic. Another factor is time period, a supply tends to becomeelastic in the long run because suppliers have more time to adjust to the price, while supplybecomes inelastic because suppliers cannot quickly adjust to the price. The next factor istechnology improvement. If the technology of the supplier is more advanced, the supplier cansupply more and the supply become elastic. Other than that, availability of factors of productionis also a factor.

By having more resources the supplier can produce more supply making thesupply elastic. Lastly, the last factor is the ease of factor substitution. The easier it is tosubstitute a factor of production, the more elastic the supply.73.0 HOW IT RELATE TO USElasticity relates to us in a lot of way especially in our daily life because we always buyproduct or services.

When we buy anything that is elasticity of demand and supply. This isbecause we are the consumer or buyer; it affects us when the price increase or decrease, it affectus when our income is different, and it affect us when the goods represent different things to us.Elasticity breaks down into few subtopics and it can be related to us. The first subtopic that can be related to us is price elasticity of demand. In price elasticity ofdemand, there is the availability of substitutes. For example, Japanese rice and Korean rice, thistwo are substitute’s goods for me because both to me taste the same. So when the price ofJapanese rice increase I will buy Korean rice instead.

After that, we have the necessities versusluxuries. The vitamin that I took since small is a necessity to me, even the price gone up I willstill buy it because I need it. The Pandora bracelet I like is luxury goods, this means I don’t needit so, when the price gone up for the bracelet I will think about it and might not buy it. Next is theproportion of expenditure, I don’t have a high income so; my demand for most goods is elasticity.Lastly, is time horizon; it related to me when I need a pen before my test which start in 10 min. Ihave two choices which are to buy a pen below in 2 min walk for RM 2 or go to the shop outsidein 8 min walk for RM 1.

I choose to buy it for RM1 because I don’t have enough time to go tothe store outside for a cheaper price.The second subtopic is income elasticity of demand.For example, if I wanted to buy thosefancy and trendy Yeezy Addidas shoes, I will need to think my own level of income. Due to mylevel of income, I will think that buying a pair of those Yeezy will be a luxury choice for me. Butfor other people like my friends, they will think that buying Yeezys are just their necessities fortheir choice of shoes.

For everyone that bought Yeezy shoes are because it satisfied them. Thoseshoes are one of the trendiest and fancy shoes, people who buy them felt satisfied when they hadwhat they wish for.8The third subtopic is Cross price elasticity of demand. Firstly the good that can be related tome is Complimentary goods. For example, I’m buying a badminton racket for my next familyouting, because badminton racket is having a promotion of 20% discounts on the total price ofRM 250. Therefore, when I bought the racket, I’ll buy shuttlecock as well. The reason why isbecause shuttlecock is the complimentary of racket. As when the price of the racket decrease, thedemand of shuttlecock would be increase as well.

After that are Substitute goods. For example, Ilike buying shirts, and I’m a fan of Padini and F.O.S.

During the date of black Friday, I went ona shopping spree, on that I notice the price of a shirt in padini drop. The price of a shirt in F.O.

Sis more expensive than Padini. That is why I choose to purchase in Padini compare to F.O.S.That is when the price decrease on Padini shirt, the demand for F.O.

S decrease. Lastly, nonerelated goods happen all the time in our life. For example, I’m shopping for closet and in themeantime, I’m also shopping for mobile phone. While I saw the price of a closet was drop. Thedemand for mobile phone that I’m looking for does not change and it stays the same. This isbecause both goods are totally not related.

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