Elasticity Of Demand And Supply : RAS Economics
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Elasticity Of Demand And Supply : RAS Economics
- The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.
- The quantity supplied of any good or service is the amount that sellers are willing and able to sell.
Elasticity Of Demand
- The price elasticity of demand measures how much the quantity demanded responds to a change in price.
- Elasticity of demand = (Percentage change in quantity demanded) / (percentage change in price)
- It is always negative.
- Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in price.
- Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.
- It measures the consumer behaviour.
Factors Affecting Price Elasticity Of Demand
Availability of close substitutes:
- Goods with close substitutes have more elastic demand.
- For ex., a small increase in the price of tea, assuming the price of coffee is held fixed, causes quantity to be tea to be sold to fall by a large amount.
Necessities versus Luxuries:
- Necessities like visiting a doctor have inelastic demand.
- Luxuries like buying a television have elastic demand.
Time Horizon:
- Demand is elastic in long run.
Elasticity Of Supply
- The price elasticity of supply measures how much the quantity supplied responds to a change in price.
- Elasticity of supply = (Percentage change in quantity supplied) / (percentage change in price)
- Supply for a good is said to be elastic if the quantity supplied responds substantially to changes in price.
- Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price.
Factors Affecting Price Elasticity Of Supply
- It depends on the flexibility of sellers to change the amount of good they produce. For ex., beachfront land has an inelastic supply whereas manufactured goods have elastic supply.
- Supply is more elastic in long run. Over short period of time, firms cannot easily change the size of their factories to make more or less of a good.
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