Concept of Elasticity And Its Application - SS2 Economics Lesson Note

Elasticity refers to the degree to which a change in one economic variable affects another economic variable. It measures the responsiveness of a variable to changes in another variable. In economics, there are several types of elasticity that are commonly used. The most common types of elasticity include:

Price elasticity of demand: This measures the responsiveness of quantity demanded to changes in price. If the price of a good increases, the quantity demanded of that good may decrease. The price elasticity of demand measures the percentage change in quantity demanded in response to a one percent change in price.

Income elasticity of demand: This measures the responsiveness of quantity demanded to changes in income. If income increases, the quantity demanded of certain goods may increase. The income elasticity of demand measures the percentage change in quantity demanded in response to a one percent change in income.

Price elasticity of supply: This measures the responsiveness of quantity supplied to changes in price. If the price of a good increases, the quantity supplied of that good may increase. The price elasticity of supply measures the percentage change in quantity supplied in response to a one percent change in price.

Cross-price elasticity of demand: This measures the responsiveness of quantity demanded of one good to changes in the price of another good. If the price of a substitute good increases, the quantity demanded of the original good may increase. The cross-price elasticity of demand measures the percentage change in quantity demanded of one good in response to a one percent change in the price of another good.

Elasticity is an important concept in economics and has many applications in economics which include:

Pricing decisions: Elasticity is used to help firms make pricing decisions. For example, if the price elasticity of demand for a product is high, a small increase in price will lead to a large decrease in demand. Therefore, firms may choose to keep prices low in order to increase demand and maximize profits.

Taxation: Elasticity is used to help governments make taxation decisions. If the elasticity of demand for a product is low, a tax on that product is unlikely to significantly reduce demand. However, if the elasticity of demand is high, a tax on that product could significantly reduce demand and discourage consumers from purchasing the product.

International trade: Elasticity is used to help countries make decisions about international trade. For example, if the price elasticity of demand for a country's exports is high, a small increase in the price of those exports will lead to a large decrease in demand. Therefore, the country may choose to keep prices low in order to increase demand and maintain exports.

Resource allocation: Elasticity is used to help allocate resources in an economy. For example, if the elasticity of demand for a certain type of labor is high, firms may be more willing to hire workers with that skill set, as a small increase in their wage will not significantly reduce demand for their products.