Economics Elasticity in Economics Is a Powerful Term Paper

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ECONOMICS

Elasticity in economics is a powerful and commanding concept, and the concept is often used to measure the response or the sensitivity of one economic variable, against change in another economic variable. The concept of elasticity can be extremely important to economists and theorists, because of the fact that it would help one to comprehend better the impact that an economic action taken would have on the particular given situation, and this in turn would help greatly in the decision making process within any organization. One of the best examples of an economic variable is 'price'. Price is often taken as an economic variable, whose response is sought after, with relation to another economic variable, which is typically, the quantity demanded of any product or service. Take an example of a bakery owner. This individual, who serves as an economic agent, would be deeply interested in finding out how a price rise would eventually impact the quantity or the number of loaves of bread that he may sell in his store. (Das, 2005)

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The bakery owner may run this thought through his mind: Suppose I were to raise the price of my most popularly sold garlic bread by $1. What impact would this have? Would the price rise affect significantly the number of garlic bread loaves that I am selling? or, on the other hand, would the price rise not affect the number of loaves sold in any significant way, and therefore, would it be insignificant? It must be remembered that as a business owner, the bakery owner is asking himself a very important and pertinent question, because he would not wish to adopt a pricing policy that would eventually make him lose out a large number of his steadfast customers, thereby eroding his revenues from the sales of the loaves of bread. If this individual were to follow the concept of price elasticity of demand, he would then be able to make a better informed decision on whether he could go ahead and raise the price of his loaves of garlic bread, or not. (Das, 2005)

Term Paper on Economics Elasticity in Economics Is a Powerful Assignment

It is now obvious that elasticity in economics measures the percentage reaction of a dependant variable to a percentage change in an independent variable. Take for example, an elasticity of -2. This means that an increase of 1% would give rise to a decrease of 2%. (Piana, 2004) Therefore, it can also be said that the degree to which a demand or a supply curve may react to any change in price can be referred to as elasticity. It is important to remember that elasticity varies greatly among different products, because of the simple reason that certain products may be considered more essential to the customer than others. In some cases, products that are considered to be 'necessities' would be rather insensitive to a price change, because of the simple fact that customers would continue to buy these products even if there was a price change, because they need these products. ("Economics basics, elasticity," n. d.)

Conversely, a price rise in a product that is not a necessity to a customer would probably deter more customers because of the simple fact that the opportunity cost of buying the product would then become much too high. A product or a service may be considered to be highly elastic in cases in which a small change in price may lead to a significant drop in sales, in both the quantity demanded, as well as in the quantity supplied. This is the kind of product or service that may be readily available in the market, but which the customer may not need in his daily life. In the same way, an inelastic good or service can be described as one that may change in price, but may not affect the demand or the supply of the product in any way. These are the goods that are required by the consumer as a necessity in his daily life, and he would purchase the product or service even if its price were a shade higher than usual. ("Economics basics, elasticity," n. d.)

It must be remembered that "Elasticity = (% change in quantity / % change in price)" and that if the elasticity is greater than or equal to one, then the curve would be elastic. ("Economics basics, elasticity," n. d.) if the curve is found to be less than one, then it can be said that the curve is inelastic. The demand curve is in fact a negative slope, and if there is a decline in the quantity demanded, accompanied by a small increase in price, the demand curve would look flatter or horizontal. This horizontal curve would means that the good or service is elastic. Similarly, inelastic demand would be represented with an upright curve, because of the fact that quantity changes very little with a large movement in price. Elasticity of supply would be represented by the fact that a change in price would eventually result in a big change in the amount supplied. This could be taken to mean that the supply curve would be flatter and more horizontal, and this type of curve would be considered elastic, and elasticity in this case would be greater than or equal to one. ("Economics basics, elasticity," n. d.)

There are several different factors that affect the elasticity of a particular product or service. These factors may either pertain to the demand or to the supply of the product or service. Take for example the factors that affect the elasticity of a product with relevance to demand, of which one is termed 'price elasticity'. A set of factors would affect the price elasticity of a curve in general, and it may be the presence of these factors that may make a consumer more than they would do if the price were to go down, and buy even less than usual when the price goes up. For example, one can consider the fact that wheat bread is considered to be better than plain white bread, and therefore, wheat bread can serve as a close substitute for white bread. In the same way, a grocery store may function in a neighborhood where there are several other similar grocery stores. If this grocery store charges too much for its products, then customers would naturally prefer to shop at other stores that charge lower rates for their products. On the other hand, if the same grocery store were to lower its prices a little, it would be able to immediately attract a lot of the other grocery stores' customers. (Wessels, 2000)

Therefore, this means that the demand for groceries is very elastic, and that the more number of substitutes there may be the more elastic the demand for the products would be. These then are the factors that may affect price elasticity: the fraction of income that people may spend on the product. In other words, the more money people may spend on a good, the more importance it may gain as far as their budget is concerned. Therefore, if the price of the product were to increase, then it would mean that these people would search long and hard for an apt substitute for the same product. Another factor affecting price elasticity would be that of deciding how narrowly defined the product may be. In other words, this may be taken in the context of defining 'bread'. Bread is a more narrowly defined good than wheat product, and white bread is more narrowly defined than bread. Therefore, it can be stated that the narrower the definition of the product, the more number of substitutes the product is likely to have. This factor would increase its elasticity as well. For example, the demand for Fords can be explained as being narrower than the demand for automobiles. In the same way, the demand for automobiles can be considered to be more elastic than the demand for transportation. (Wessels, 2000)

Another important factor that would determine price elasticity would be how easy it may be for a customer to be able to find substitutes for the products that they want to purchase. The easier it is for a customer to find out about alternatives, and differences in prices, the more elastic the demand for that particular product would be. This is where advertising plays a major role; it is advertising that tells a customer where substitutes are available, and what their prices are. The amount of time one may need to adjust to price changes may be a crucial factor in affecting and determining price elasticity. That is, in other words, the more time a customer may have in researching substitutes, the more elastic the demand becomes. (Wessels, 2000) Demand is said to be elastic in relation to price, in cases where an increase in price may cause a proportionately larger fall in the quantity demanded, and it is also stated to be inelastic when a price increase causes a proportionately smaller… [END OF PREVIEW] . . . READ MORE

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