Information AboutElasticity (economics) |
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One typical application of the concept of elasticity is to consider what happens to consumer demand for a good (for example, a product) when prices increase. As the price of a good rises, consumers will usually demand less of that good, perhaps by consuming less, substituting other goods, and so on. The greater the extent to which demand falls as price rises, the greater is the Price Elasticity Of Demand . However, there may be some goods that consumers require, cannot consume less of, and cannot find substitutes for even if prices rise (for example, certain prescription drugs). For such goods, the price elasticity of demand might be considered inelastic. Further, elasticity will normally be different in the short term and the long term. For example, for many goods the supply can be increased over time by locating alternative sources, investing in an expansion of production capacity, or developing competitive products which can substitute. One might therefore expect that the Price Elasticity Of Supply will be greater in the long term than the short term for such a good, that is, that supply can adjust to price changes to a greater degree over a longer time. The concept of elasticity has an extraordinarily wide range of applications in economics. In particular, an understanding of elasticity is useful to understand the dynamic response of Supply And Demand in a market, in order to achieve an intended result or avoid unintended results. For example, a business considering a price increase might find it lowers their profits if demand is highly elastic, as sales would fall sharply. Similarly, a business considering a price cut might find that it does not increase sales, if demand for the product is price inelastic. GENERALIZED CASES Keeping in mind the example of price elasticity of demand, these figures show ''x'' = ''Q'' horizontal and ''y'' = ''P'' vertical. Figure 1: Illustrations of perfect elasticity and perfect inelasticity. MATHEMATICAL DEFINITION The general formula for elasticity (the "''y''-elasticity of ''x''") is:
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