ELASTICITY

Elasticity



Elasticity

Introduction

Elasticity is a concept economic introduced by the British economist Alfred Marshall, from the physical to quantify the variation in one variable to change another. To understand the economic concept of elasticity we must start from the existence of two variables, among which there is a certain dependency, for example the number of cars sold and the price of cars, or gross domestic product and interest rates. The elasticity measures the sensitivity of the number of cars sold to the price variation thereof, or in the second case the sensitivity to variations GDP interest rates (Bentzen & Engsted, 1996). That is why elasticity can be understood or defined as the percentage change of a variable X in relation to a variable Y. If the percentage change in the dependent variable is greater than the independent variable X, we say that the relationship is elastic because the dependent variable varies more than the X variable. Conversely, if the percentage change in the variable X is greater than Y, the ratio is inelastic.

Elasticity is one of the most important concepts used in economic theory. It is used in the study of demand and the different types of assets that exist in consumer theory, the incidence of indirect taxation, marginal concepts in the theory of the firm, and the distribution of wealth. Elasticity is also important in the analysis of the distribution of welfare, in particular consumer surplus and producer surplus. The price elasticity of demand or simply elasticity of demand measures the relative or percentage change in quantity demanded resulting from a change in the price of one percent, in other words measures the intensity with which buyers respond to a variation in the price.

Discussion

The elasticity is often used with respect to the price-demand and price-offer, but the applicability of this concept is not restricted to this single case, but is broader, since the elasticity is calculated as percentages which are the only way to get a unit of measurement. When calculating a ratio elasticity maintaining the units of measure, therefore, do not measure a proportional change, but a tendency, as the propensity to consume Keynes ("Supply and Demand," 2009). From a mathematical point of view of elasticity E is a real number that reflects what percentage increase in a variable and will increase if a percentage of a variable X, which controls or partly determines the level of Y: In a market economy , if you increase the price of a product or service, the quantity demanded of it will fall, and if the price of that product or service, quantity demanded will rise. The elasticity reports the extent to which demand is affected by changes in the price, so there may be products or services for which the rise in price causes a small change in quantity demanded, this means that consumers will buy the same amount, regardless of price changes, demand for this product is an inelastic demand. The reverse process is when small variations in the ...