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Elasticity is a concept in microeconomics that reflects "the degree to which a demand or supply curve varies among products" (Investopedia, 2013). Thus, the degree to which demand or supply of a good changes with a change in the price. This dynamic can be calculated using the following formula:
Elasticity = (% change in quantity / % change in price)
In general, a good is characterized as elastic if the change in quantity is greater than the change in price, in other words if E > 1. If the change in quantity is lesser than the change in price, demand for the good is considered to be inelastic. If the demand changes exactly as the price changes, in order words if E = 1, then the good is said to be perfectly elastic. Perfect elasticity is uncommon, and is observed mostly in theoretical examples (Moffatt, 2013). There is also reverse elasticity. This situation arises when elasticity is inverse, in order words if E < 0. This situation can occur with luxury goods. The reason for this is that the utility in buying a luxury good is not just based on the intrinsic value of the good, but on the prestige associated with the good. If the good is too affordable, the prestige value is minimal. If the price of the good increases, then the prestige increases. Since much of the utility of the good derives from the prestige, the demand for the good is likely to be reverse elastic...
The first is that there are several factors that affect elasticity. The most basic factor is the importance of the good. Some goods are inelastic because they are considered to be necessities. This is the case for something like gasoline, which has very low elasticity of demand in the short run, and only slightly higher elasticity in the long run. People who live in places where driving is the only way to get around need gasoline, and there are constraints on how much their consumption can change with the price at the pump. However, for something like cola that is not a necessity, price elasticity of demand will be higher. If the price of gas increases $2/gallon, consumption will only decline slightly; if cola increases $2/gallon, consumption will decrease much more.
One of the other key factors affecting elasticity is the availability of substitutes. Gas and cola provide a good illustration of how this works. Where substitutes are readily available, consumers are apt to substitute when the price of a good increases. For cola, people will simply find other beverages to consume if the price of cola increases dramatically. There are many good options, most of…
Works Cited:
Investopedia. (2013). Economics basics: Elasticity. Investopedia. Retrieved April 20, 2013 from http://www.investopedia.com/university/economics/economics4.asp
Moffatt, M. (2013). Price elasticity of demand. About.com. Retrieved April 20, 2013 from http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
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