Elasticity Essay Example | Topics and Well Written Essays - 1250 words

Elasticity - Essay Example The function of responsiveness of a particular variable to the change in parameters of the other variables is what elasticity is all about. The frequently used dimensions of elasticity include price elasticity of demand, price elasticity of supply, income elasticity of demand and elasticity of substitution between factors of production. Because of the immense contribution that the concept of elasticity has made to the study of responsiveness of price and other factors to changes in demand and supply, it has indeed made a significant contribution to the understanding of the market and agents in its. This is the topic for this paper and the subsequent paragraphs discuss the concept in detail along with the example of a supermarket to elucidate the concept. If we take the first dimension or the PED (Price Elasticity of Demand), this is the percentage change in the quantity demanded for a drop or rise in price and hence measures how â€Å"elastic† the demand is to a change in the price of the good. The measurement of PED is by dividing the percentage change in the quantity demanded by the percentage change in the price and since either the percentage change in demand or the percentage change in price is negative, the PED is always negative. Hence, the PED is usually expressed in terms of absolute values. Goods that have a PED of more than 1 are supposed to be highly elastic meaning that changes in price have a large effect on the change in demand. On the other hand, goods that have a PED less than 1 or between 0 and 1 are supposed to be inelastic or relatively inelastic. This is because the change in demand is not that much greater for a change in price (Ayers & Collins, 2003). If we apply this dimension to the case of the superm arket, we find that goods like alcoholic beverages and luxury products like perfumes and cosmetics are highly elastic since a drop in the price invariably leads to