Elasticity Of Demand

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Elasticity has been described as the degree of responsiveness of the quantity demanded relative to the factors that influence the quantity demanded (“Definition of Elasticity”, n.d.). There are two types of elasticity, the elasticity of demand which includes price elasticity of demand, income elasticity of demand, and cross elasticity of demand (McConnell, Brue, & Flynn, 2012). There is also elasticity of supply. Elasticity can vary among products because there are some goods that may be more essential to one consumer rather another consumer. Price elasticity plays an important role in the lives of consumers. The price elasticity of demand is the sensitivity of the demand for a product when its price changes (McConnell, Brue, & Flynn, …show more content…
“Marshall, who introduced the concept of elasticity in economic theory, remarks that the elasticity or responsiveness of demand in a market is great or small according as the amount demanded increases much or little for a given full in price, and diminishes much or little for a given rise in price” (Chand, Smriti, 2014). Companies use the price elasticity of demand to determine the price of their products and their total sales and revenue. The results from the income elasticity of demand tells companies that during economic recession, they should decrease the production of the luxurious goods because people do not have the income to afford those goods. This can help prevent the surplus of the good and excess of raw materials. The concept of cross elasticity of demand has made advertising and marketing for complementary and substitute goods necessary for companies to create brand loyalty and make demand less sensitive to price. Based on the price elasticity of supply, most companies do not take the chance in investing in unpredictable goods as it could be very time-consuming and cost the company a lot of money. For example: Gold production. Even when the demand is there, fewer firms will be involved in it as its inelasticity also makes it difficult for suppliers to react swiftly to price changes (McConnell, Brue, & Flynn, 2012). In return, the company can either receive or lose a …show more content…
Many goods are subject to taxation by the government. For example, liquor and cigarettes are inelastic goods that are taxed by the government. In today’s society there are a lot of people that are addicted to buying those two goods even when the price is really high. This gives the government the power to impose a higher tax on those goods as well as other goods such as gasoline. There is a big difference between how the poor and the rich live in today’s world. The income elasticity of demand has caused the government to give a higher income tax on the rich so the gap between the rich and the poor is not so broad. The taxes collected from the rich are then in return used to build facilities, like hospitals, and build roads. By using the idea of cross elasticity of demand, the government can evaluate whether a merge between two large firms will reduce competition and violate the antitrust laws (McConnell, Brue, & Flynn,

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