Discuss the meaning and importance of the concept of elasticity in microeconomic reasoning - Essay Example

THE MEANING AND IMPORTANCE OF THE CONCEPT OF ELASTI IN MICROECONOMIC REASONING The Meaning and Importance of the Concept of Elasticity in Microeconomic ReasoningThe concept of elasticity is an important part of the neoclassical economic theory. It helps in the understanding of the incidences of indirect taxation. Elasticity is a valuable tool when it comes to discussing welfare distribution. The concept of Elasticity is also used to explain many marginal concepts and their relation to wealth, consumer choice and types of goods.

It is also an important tool for empiricists as it is ideal for simplifying data analysis. Elasticity is the change brought in by one variable as a result of a change in another variable. It serves in determining the responsiveness of two different variables to one another.So mainly, Elasticity is an accurate indicator for demand and supply. There are four kinds of Elasticity:1. Price elasticity of demand i.e. how does price change affect consumer demand?2. Income elasticity of demand i.e. how does a change in their income affect consumer demand?3. Cross price elasticity of demand i.e. how responsive is consumer demand to a change in competitors pricing?4. Price elasticity of supply i.e. how capable are the suppliers of increasing their supplies with a change in price?

These four types together can provide economists with valuable information. For example, it can help economists ascertain whether it would be more profitable to increase or decrease the price of a particular product based on price elasticity of demand. Elasticity helps determine if a good is of inferior quality or normal quality based on price elasticity of demand. An inferior quality product is consumed less if the consumers’ income increasing while a normal quality product has higher consumption along with rising income of the consumer.

Similarly, Elasticity can help decide whether the products are compliments or supplements. The difference between the two is that with complimentary goods the demand for one leads to demand for another of the same product, while supplementary goods are those that guide to less demand for another product. Cross price elasticity of demand determines if a product is a compliment or supplement. And lastly, price elasticity of demand can help economists find out whether her a supplier e.g. a farmer, will have the capability to suddenly increase their supply.

Farmers and other agricultural goods producers have low price elasticity of supply as it takes them a long time to increase their supplies because their supplies take a long time to produce. So, in short, elasticity is used when economists want to know how something changes in relation to a change in another. The concept of elasticity is an integral part of the theory of microeconomics. Law of demand tells us that an increase in the price of a product leads to a decrease in its demand. Here, Elasticity can tell us how much demand will decrease for every one per cent increase in price.

An elasticity of 1 or higher is “elastic”. While inelastic refers to products that remain on constant demand no matter what their price is.