Economics Elasticity - Term Paper Example

ELASTI When you hear the word "elasti , probably the first thing that would pop up in your mind is a bunch of rubber; bumping into the term is indeed kind of amusing knowing that this is an Economics class not Physics. Well, in economics, according to Morgan Rose, there are many different measures of elasticity distinguished by the pair of variables that each one considers, but at their core they are all simply comparisons of how one thing changes in response to changes in another (2003), or algebraically, Elasticity = (dY/Y) / (dX/X) = (dY/dX) * X/Y , or the % change in the dependent variable, i.e. demand, supply, etc., dY/Y, divided by the change in the independent variable, i.e. price, income, etc., dX/X (Johnson 2005). Some of these measures are Price Elasticity of Demand (PED), Cross Elasticity of Demand (XED), and Income Elasticity of Demand (YED), which are commonly associated with the following definitions: a) PED measures the responsiveness of quantity demanded (QD) of a good when its price changes: PED = (% change in QD)/( % change in price); b) XED measures the responsiveness of quantity demanded of one good (A) when price of another good (B) changes, or mathematically, XED = (% change in QD good A)/( % change in price good B), and; c) YED determines the responsiveness of quantity demanded of a good when income of the consumer changes, that is, YED = (% change in QD)/( % change in income), (Das 2005). To better grasp the concept of elasticity, consider the following numerical examples: 1. If PED for internet service is -0.5 and price increased by 10%, then, by definition, % change in the demand for the service is, (-0.5)(10%) = -5%, where the negative sign indicates a decrease. 2. If XED is -1.25, then a 10% decrease in the price of Coke implies a 12.5% increase in the demand of Pepsi. 3. If YED is +1.5, then a 10% increase in the consumers income suggests a 15% increase in the QD of cell phones. Now, lets look into the most common of them all: PED. When a change in price leads to a bigger or proportionate % change in demand, that is, PED≥1, the good or service is said to have an elastic demand, and inelastic, if a change in price leads to a smaller % change in demand or PED Read More