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2.3. Elasticity - Measure of Resonsiveness

1) The document discusses elasticity, which measures the responsiveness or sensitivity of quantities exchanged to changes in variables like price and income. 2) There are four types of elasticities, including price elasticity of demand which measures the responsiveness of quantity demanded to changes in price, with other factors held equal. 3) Price elasticity of demand can be calculated using percentage changes in quantity demanded and price at a single point on the demand curve, known as point elasticity, or between two points, known as arc elasticity.

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50 views

2.3. Elasticity - Measure of Resonsiveness

1) The document discusses elasticity, which measures the responsiveness or sensitivity of quantities exchanged to changes in variables like price and income. 2) There are four types of elasticities, including price elasticity of demand which measures the responsiveness of quantity demanded to changes in price, with other factors held equal. 3) Price elasticity of demand can be calculated using percentage changes in quantity demanded and price at a single point on the demand curve, known as point elasticity, or between two points, known as arc elasticity.

Uploaded by

gebre
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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2.3.

ELASTICITY MEASURE OF RESONSIVENESS


Generally speaking, whenever the price of a certain commodity goes up, the quantity demanded
of the commodity goes down, keeping all other determinants of demand intact. This is what we
call the law of demand. But, the law of demand does not tell the extent or degree to which the
increase in the price of a commodity would cause the quantity demanded of the commodity to
decline.
The owner of a business may not be able to find the influence of the variables that affect the
demand for his/her product by using only the demand function. Moreover, it is insufficient for
businesses to know only the negative relationship that exists between the price of a commodity
and the quantity demanded of the commodity. Businesses also need to predict the effect of price
changes on their revenues and the sensitiveness of buyers to price changes.
The degree of responsiveness or sensitiveness of quantities exchanged (quantities bought and
sold) to the change in various variables is called elasticity. In general, elasticity measures the
responsiveness or sensitiveness of consumers and sellers to changes in various variables such as
price and income and time. The greater the degree of responsiveness, the larger the size of
elasticity; and the smaller the degree of sensitiveness; the smaller the size of elasticity.
There are four (4) different elasticities:
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1) Price elasticity of demand (Ed)


The price elasticity of demand (Ed) measures the responsiveness of quantity demanded of a
commodity to changes in its price, other things being equal. The price elasticity of demand (E d)
at any point on the demand curve is defined as the percentage change in quantity demanded as a
result of the percentage change in own price.
Mathematically,
Price elasticity of = Percentage change in quantity demanded of X
Demand (Ed) Percentage change in price of X

Ed = % change in Qx
% change in Px
= Q2 Q1 X 100
Q1
P2 P1 X 100
P1
Where:
Q = Change in quantity demanded
P = Change in Price
Q1 = Original quantity demanded
P1 = Original price
= Q P
Q1 P1
= Q X P1 Ed = -Q x P1
Q1 P P Q1

The above formula is known as the point elasticity of demand. This is because it measures the
price elasticity of demand at a given point on the demand curve.

Elasticity can also be measured between two points on the demand curve. The measure of
elasticity of demand between any two finite points on the demand curve is known as arc
elasticity of demand (average elasticity of demand).

Arc elasticity of demand can be mathematically expressed

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