Getting to Elasticity

Elasticity

 1.) Elasticity

What is an Elasticity in Economic Definitions?

Elasticity is the measure of responsiveness. It will measure how much something changes when there is a change in one of the factors that determines it. 

3 Elasticities of demand to consider: 

price elasticity of demand [PED]

cross Elasticity od Demand[XED]

income elasticity of demand[YED]

How Does it Work?

The price elasticity of demand is a measure of how much the quantity demanded of a product changes when there is a change in the price of the product. 

In the PED there are two extreme values, when the PED is equal to zero and when the value is infinity.

When the PED equals to zero, then a change in the price of a product will have no effect on the quantity demanded at all, and when it is infinity it is a perfectly elastic in price. 

Also there are inelastic demand and elastic demand, the inelastic demand is less than one and greater than zero, and the elastic demand is greater than one and less than infinity. Also there is the unit elastic demand when it is equal to one. 

In the PED there are determinants: the number and closeness of substitutes/ the necessity of the product and how widely the product is defined/ and the time period considered. 

2.) Example

So there is a company that produces pillows, and lowers the price of the pillows from $5 to $4.50 and finds that the weekly quantity demanded of the pillows increases from 1000 to 1500. 

The PED= 5%

The total Revenue rises by: $1750

So if the total revenue decreases the interests of the population will decrease.