IMPACT OF ELASTICITY IMPACT OF ELASTICITY ON OUR LIFEON OUR LIFE

FROMFROMMUHAMMAD FAIZAN RAZAMUHAMMAD FAIZAN RAZA

Elasticity is a measure of the responsiveness of one variable to changes in some other variable.For example, advertising elasticity is the relationshipbetween a change in a firm's advertising budget and the resulting change in product sales.

Economists are often interested in the price elasticity of demand, which measures the response of the quantity of an item purchased to a change in the item's price.

Elasticity measures are reported as a proportional or percent change in the variable being studied. The general formula for elasticity, represented by the letter "E“ in the equation below, is:

E percent change in x / percent change in y.

Elasticity can be zero, one, greater than one, less than one, or infinite.

When elasticity is equal to one, there is unit elasticity.This means the proportional change in one variable is equal to the proportional change in another variable, or in other words,the two variables are directly related and move together.

When elasticity is greater than one, the proportional change in xis greater than the proportional change in y and the situation is said tobe elastic.

Elasticity for Managerial Decision Elasticity for Managerial Decision MakingMaking

Economists compute several different elasticity Economists compute several different elasticity measures,measures,

Including the price elasticity of demand, the price Including the price elasticity of demand, the price elasticity of supply, and the income elasticity of elasticity of supply, and the income elasticity of

demand.demand.

Elasticity is typically defined in terms of changes in Elasticity is typically defined in terms of changes in total revenue since that is of primary importance total revenue since that is of primary importance

to managers, CEOs, and marketers. to managers, CEOs, and marketers. For managers, a key point in the discussions of For managers, a key point in the discussions of

demand is what happens when they raise prices for demand is what happens when they raise prices for their products and services.their products and services.

It is important to know the extent to which a It is important to know the extent to which a percentage increase in unit price will affect the percentage increase in unit price will affect the

demand for a product.demand for a product.

With elastic demand, total revenue will decreaseWith elastic demand, total revenue will decreaseif the price is raised. With inelastic demand, if the price is raised. With inelastic demand,

however,however,total revenue will increase if the price is raised.total revenue will increase if the price is raised.

The possibility of raising prices and increasing dollar sales (total revenue) at the same time is very attractive to managers. This occurs only if the demand curve is inelastic.

Here total revenue will increase if the price is raised, but total costs probably will not increase and, in fact, could go down.

Since profit is equal to total revenue minus total costs, profit will increase as price is increased when demand for a product is inelastic.

It is important to note that an entire demand cure is neither elastic or inelastic; it only has the particular condition for a change in total revenue between two points on the curve (and not along the whole curve).

Demand elasticity is affected by the availability of substitutes, the urgency of need, and the importance of the item in the customer's budget.Substitutes are products that offer the buyer a choice.

For example, many consumers see corn chips as a good or For example, many consumers see corn chips as a good or homogeneous substitute for potato chips, or see sliced homogeneous substitute for potato chips, or see sliced

ham as a substitute for sliced turkey. The more ham as a substitute for sliced turkey. The more substitutes available, the greater will be the elasticity of substitutes available, the greater will be the elasticity of

demand. If consumers see products as extremely different demand. If consumers see products as extremely different or heterogeneous, however, then a particular need cannot or heterogeneous, however, then a particular need cannot easily be satisfied by substitutes. In contrast to a product easily be satisfied by substitutes. In contrast to a product

with many substitutes, a product with few or no with many substitutes, a product with few or no substitutes—like gasoline—will have an inelastic demand substitutes—like gasoline—will have an inelastic demand curve. Similarly, demand for products that are urgently curve. Similarly, demand for products that are urgently needed or are very important to a person's budget will needed or are very important to a person's budget will

tend to be inelastic. It is important for managers to tend to be inelastic. It is important for managers to understand the price elasticity of their products and understand the price elasticity of their products and

services in order to set prices appropriately to maximize services in order to set prices appropriately to maximize firm profits and revenues.firm profits and revenues.

Income Elasticity Of DemandIncome Elasticity Of Demand

A measure of the relationship A measure of the relationship between a change in income and a between a change in income and a

change in quantity of a good change in quantity of a good demanded.demanded.

In economics, income elasticity of In economics, income elasticity of demand measures the demand measures the

responsiveness of the demand for a responsiveness of the demand for a good to a change in the income of good to a change in the income of the people demanding the good, the people demanding the good,

holding all prices constant under the holding all prices constant under the concept of ceteris paribus. It is concept of ceteris paribus. It is calculated as the ratio of the calculated as the ratio of the

percentage change in demand to the percentage change in demand to the percentage change in income. For percentage change in income. For example, if, in response to a 10% example, if, in response to a 10%

increase in income, the demand for a increase in income, the demand for a good increased by 20%, the income good increased by 20%, the income

elasticity of demand would be elasticity of demand would be 20%/10% = 2.20%/10% = 2.

Output ElasticityOutput Elasticity

In economics, output In economics, output elasticity is the percentage elasticity is the percentage change of output (GDP or change of output (GDP or production of a single firm) production of a single firm) divided by the percentage divided by the percentage change of an input. It is change of an input. It is sometimes called partial sometimes called partial output elasticityoutput elasticity

Yield elasticity of bondYield elasticity of bond

Yield elasticity of bond Yield elasticity of bond value is the percentage value is the percentage change in bond value change in bond value divided by a one per divided by a one per percentage change in the percentage change in the yield to maturity of the yield to maturity of the bond. This is equivalent to bond. This is equivalent to saying the derivative of saying the derivative of value with respect to yield value with respect to yield times the (interest times the (interest rate/value). This is equal to rate/value). This is equal to the MacAulay Bond the MacAulay Bond Duration times the Duration times the discount rate, or the discount rate, or the modified bond duration modified bond duration times the interest rate.times the interest rate.

Supply & Demand, And Price ElasticitySupply & Demand, And Price Elasticity

All things in our society are connected in All things in our society are connected in some way, for example, how humans relate some way, for example, how humans relate to each other. Complex ideas and analysis to each other. Complex ideas and analysis

are notare notwithout their own set of unique connections. without their own set of unique connections.

The intricate theories of economics are a The intricate theories of economics are a prime example of this connection. To gain prime example of this connection. To gain

an accuratean accurateunderstanding of how supply and demand understanding of how supply and demand

are connected, and its role within the are connected, and its role within the market, one must analyze the functions of market, one must analyze the functions of each as separate entities, and how they each as separate entities, and how they relate to economics as a whole. To begin relate to economics as a whole. To begin analysis, one must examine what causes analysis, one must examine what causes

change between supply and demand.change between supply and demand.Once this has been achieved, investigating Once this has been achieved, investigating how changes in price and quantity influence how changes in price and quantity influence market equilibrium, and how the necessity market equilibrium, and how the necessity

of a good and the availability of of a good and the availability of substitutions impact price elasticity will substitutions impact price elasticity will

need to be conducted. The final stepneed to be conducted. The final stepwill be to compare and contrast market will be to compare and contrast market

systems and the role of an economist within systems and the role of an economist within these systems.these systems.

A Life Lesson in Income A Life Lesson in Income ElasticityElasticity Income elasticity has always interested me because of its Income elasticity has always interested me because of its

true to life applications. It’s very remarkable how one can true to life applications. It’s very remarkable how one can actually see how their demand curves shift to the left and actually see how their demand curves shift to the left and right as our income fluctuates.right as our income fluctuates.

When I lived at home and my parents subsidized a great When I lived at home and my parents subsidized a great deal of my expenses, normal goods made up a good deal of deal of my expenses, normal goods made up a good deal of my consumption. This is because the quantity demanded my consumption. This is because the quantity demanded for normal goods increases as income increases.for normal goods increases as income increases.

After high school, I left to Mexico on a 2-year mission for After high school, I left to Mexico on a 2-year mission for the LDS Church. We received 200 pesos a week (roughly the LDS Church. We received 200 pesos a week (roughly $20) for food and living expenses. That’s when inferior $20) for food and living expenses. That’s when inferior goods such as rice, beans, and tortillas became a normal goods such as rice, beans, and tortillas became a normal part of my diet.part of my diet.

When I returned home, my parents helped me get on my When I returned home, my parents helped me get on my feet and I had somewhat of a cross between normal and feet and I had somewhat of a cross between normal and inferior goods at my disposal. Now, I am a married college inferior goods at my disposal. Now, I am a married college student and inferior goods seem to have raided my house student and inferior goods seem to have raided my house and built a permanent establishment in most locations.and built a permanent establishment in most locations.