Definition Of Elasticity
What is Elasticity
Economic elasticity is defined as the responsiveness of a dependent economic variable to changes in influencing factors, such as price, income and price of related products. It is a measure of responsiveness between any two variables.
I. Elasticity of Demand
Demand elasticity refers to the reaction or the response of the consumers to changes in determinants of demand such as price, income and price of related products. As discussed earlier, when price of commodities increases, the logical behavior of the consumer is to decrease consumption. However, the degree of reaction varies from one consumer to another, taking into values and preferences.
A. What are the Factors Affecting Demand Elasticity
1. Availability of
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Joint demand
There are goods that are being jointly demanded such as car and gasoline. The elasticity of demand of the second good depends on the elasticity of demand of the main good. In our example if the demand for car is inelastic, the demand for gasoline will also be inelastic.
B. Classification of Demand Elasticity
1. Elastic demand – demand is elastic if the percentage change in the price results in a larger percentage change in the quantity demanded.
2. Perfectly elastic demand – the extreme subcategory of elastic demand wherein the quantity demanded changes by an infinite amount in response to a price change resulting to a horizontal demand curve.
3. Inelastic demand – when the percentage change in the quantity demanded is lower than the percentage change in the price, we say that demand is inelastic.
4. Perfectly inelastic demand - the extreme category of inelastic demand where the quantity demanded does not change in response to a price change resulting to a vertical demand curve.
5. Unitary elastic – when the percentage change in the price results to an equal percentage change in the quantity
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Income Elasticity of Demand
Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in real income or the buying responses of consumers when their incomes change .The formula for calculating income elasticity is:
It can be noted that the formula is similar to that of price elasticity of demand, except that the determinant of consumption is income. Further, the negative and positive signs matter, when you are computing for the income elasticity of demand. The sign and the number provide different information about the relationship between income and demand.
Normal goods have a positive income elasticity of demand which means an increase in income causes an increase in demand. For normal necessities income elasticity of demand is positive but less than 1.
A luxury good means an increase in income causes a bigger percentage increase in demand. It means that the income elasticity of demand is greater than one. When income rises, people spend a higher percentage of their income on the luxury good. It should be noted that a luxury good is also a normal good, but a normal good is not necessarily a luxury
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