What is elasticity? Define price elasticity of demand?

Elasticity: Elasticity is the measure of the sensitivity of one variable to another. A highly elastic
variable will respond more dramatically to changes in the variable it is dependent on.

elasticity measures the percentage change of one economic variable in response to a percentage

change in another

Price Elasticity Of Demand : Price elasticity of demand is the ratio of the percentage change in
quantity demanded of a product to the percentage change in price. Economists employ it to
understand how supply and demand change when a product’s price changes.

Price elasticity of demand is a measurement of the change in the consumption of a product in

relation to a change in its price. Expressed mathematically, it is:

Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change

in Price
e(p)=dQ/Q
dP/P
e(p) = price elasticity
Q = quantity of the demanded good
P = price of the demanded good
The prices of some goods are very inelastic. That is, a reduction in price does not increase
demand much, and an increase in price does not hurt demand, either. For example, gasoline has
little price elasticity of demand. Drivers will continue to buy as much as they have to, as will
airlines, the trucking industry, and nearly every other buyer.

Factors That Affect Price Elasticity of Demand

Availability of Substitutes
The more easily a shopper can substitute one product for another, the more the price will fall.
For example, in a world in which people like coffee and tea equally, if the price of coffee goes
up, people will have no problem switching to tea, and the demand for coffee will fall. This is
because coffee and tea are considered good substitutes for each other.

Urgency:
The more discretionary a purchase is, the more its quantity of demand will fall in response to
price increases. That is, the product demand has greater elasticity.

Say you are considering buying a new washing machine, but the current one still works; it’s just
old and outdated. If the price of a new washing machine goes up, you’re likely to forgo that
immediate purchase and wait until prices go down or the current machine breaks down.
Duration of Price Change:
The length of time that the price change lasts also matters. Demand response to price
fluctuations is different for a one-day sale than for a price change that lasts for a season or a
year.

Q. Define price elasticity of Supply?

The price elasticity of supply is a measure of the degree of responsiveness of the quantity
supplied to the change in the price of a given commodity. It is an important parameter in
determining how the supply of a particular product is affected by fluctuations in its market price.
It also gives an idea about the profit that could be made by selling that product at its price
difference. In this article, we will discuss the elasticity of the supply formula, different types of
elasticity of supply, the supply curve characteristics, and many more. 

Price Elasticity of Supply Formula

After having understood the elasticity of supply definition in economics, we now move to the
elasticity of supply formula which is based on its definition.

ES= %ΔP

%ΔQ

Here,
ES denotes the elasticity of supply which is equal to the percentage change in quantity supplied
divided by the percentage change in the price of the commodity. 
5 Types of Elasticity of Supply
Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit elastic
supply, less than unit elastic, and perfectly inelastic. Read below to know them in more detail. 
1. Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of
supply is infinite. This means that even for a slight increase in price, the supply becomes
infinite. For a perfectly elastic supply, the percentage change in the price is zero for any
change in the quantity supplied.
2. More than Unit Elastic Supply: When the percentage change in the supply is greater
than the percentage change in price, then the commodity has the price elasticity of supply
greater than 1.
3. Unit Elastic Supply: A product is said to have a unit elastic supply when the change in
its quantity supplied is proportionate or equal to the change in its price. The elasticity of
supply, in this case, is equal to 1.
4. Less than Unit Elastic Supply: When the change in the supply of a commodity is lesser
as compared to the change in its price, we can say that it has a relatively less elastic
supply. In such a case, the price elasticity of supply is less than 1.
5. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the
percentage change in the quantity supplied is zero irrespective of the change in its price.
This type of price elasticity of supply applies to exclusive items. For example, a designer
gown styled by a famous personality.

Q. Determinants of Price Elasticity of Supply

 Marginal Cost- As the cost of producing one more unit is rising with output or Marginal
Costs (which are the increased costs related to each additional unit produced) are rising
rapidly with output, then the rate of output production will be limited, i.e Price Elasticity
of Supply will be inelastic., which means that the percentage of quantity supplied
 changes less than the change in price. However, if Marginal Cost rises slowly, then
Supply will be elastic.
 Time- As the price elasticity of supply increases over time, producers would increase the
quantity supplied by a greater percentage than the price increases.
 Number of Firms- It is more likely that the supply will be elastic when there are a large
number of firms. This occurs because other firms can step in to fill the supply gap.
 Mobility of Factors of Production- When the factors of production are mobile, then the
price elasticities of supply are higher. This means that labor and other manufacturing
inputs may be imported from other regions to quickly increase production.

The five factors that affect price elasticity of demand are:

 Luxury.
 Time period.
 Availability of substitutes.
 Necessity and demand of a commodity.
 The proportion of income spent on the good

Q. Unit elasticity of demand?

Unit elastic demand is referred to as a demand in which any change in the price of a good leads
to an equally proportional change in quantity demanded. In other words, the unit elastic demand
implies that the percentage change in quantity demanded is exactly the same as the percentage
change in price.

Q. If the elasticity is greater than one ?

If the price elasticity of demand is greater than 1, it is deemed elastic. That is, demand for the
product is sensitive to an increase in price. A price increase for a fancy cut of steak, for example,
may make many customers choose hamburger instead.

Q. If the elasticity is less than one ?

If the value is less than 1, demand is inelastic. In other words, quantity changes slower than
price. If the number is equal to 1, elasticity of demand is unitary. In other words, quantity
changes at the same rate as price.

Q. when the demand is elastic or inelastic discuss the nature of price and total revenue?

If demand is price elastic, then decreasing price will increase revenue. c) If demand is perfectly
inelastic, then revenue is the same at any price. d) Elasticity is constant along a linear demand
curve and so too is revenue
When demand is price inelastic, a given percentage change in price results in a smaller
percentage change in quantity demanded. That implies that total revenue will move in the
direction of the price change: an increase in price will increase total revenue, and a reduction in
price will reduce it.

Q. Discuss the nature cross price elasticity of demand for substitute and compliments ?

The cross elasticity of demand for substitute goods is always positive because the demand for
one good increases when the price for the substitute good increases. Alternatively, the cross
elasticity of demand for complementary goods is negative.

Chapter-7
Q. Explain how seller cost and producer surplus and supply curve are related ?

The supply curve acts as a representation of the positive relationship between the quantity
supplied and price. It shows that an increase in the price of commodities causes an increase in the
amount supplied as suppliers yearn to supply more. Thus, the height of the supply curve is a
clear representation of the seller's cost.
Producer surplus is the variance between the real price and the least willingness to accept. It
equates to the amount sellers collect after selling minus production cost

Q. How buyer cost willingness to pay consumer surplus and the demand curve are related

The demand curve shows the buyers' willingness to pay at various quantities and prices. If the
buyer's willingness to pay is more than the seller's price, the difference is the consumer surplus.

If the purchasing power in your market population goes up, your demand curve will shift to the
right. So, if people have higher income, they're probably more willing to pay as they are also
more able to pay. When your market population grows, the demand will go up. And again your
curve will shift to the right
Q. In a supply and demand diagram show producer and consumer surplus and market
equilibrium
Equilibrium is formally defined as a state of rest or balance due to the equal action of opposing
forces. In economics, these forces are supply and demand. As we will see, when supply and
demand are not in balance, economic forces will work until the balance is restored.
The equilibrium price is the price at which the quantity demanded equals the quantity supplied. It
is determined by the intersection of the demand and supply curves. A surplus exists if the
quantity of a good or service supplied exceeds the quantity demanded at the current price; it
causes downward pressure on price.

Q. What is welfare economics ?

Welfare economics is the study of how the allocation of resources and goods affects  social
welfare. This relates directly to the study of economic efficiency and income distribution, as
well as how these two factors affect the overall well-being of people in the economy.
Welfare economics begins with the application of utility theory
in microeconomics. Utility refers to the perceived value associated with a particular good or
service. In mainstream microeconomic theory, individuals seek to maximize their utility
through their actions and consumption choices, and the interactions of buyers and sellers
through the laws of supply and demand in competitive markets yield consumer and producer
surplus.

Chapter-9
Q. Why should government allow international trade in country?

International trade not only results in increased efficiency but also allows countries to participate
in a global economy, encouraging the opportunity for foreign direct investment (FDI). In theory,
economies can thus grow more efficiently and become competitive economic participants more
easily
 International trade not only results in increased efficiency but also allows countries to
participate in a global economy, encouraging the opportunity for foreign direct investment
(FDI). In theory, economies can thus grow more efficiently and become competitive economic
participants more easily.

For the receiving government, FDI is a means by which foreign currency and expertise can
enter the country. It raises employment levels and, theoretically, leads to a growth in the gross
domestic product (GDP). For the investor, FDI offers company expansion and growth, which
means higher revenues.

Q. Why should a government restricted international trade in a country ?

some reasons why a country imposes restrictions on trade are:

 Protecting established domestic industries from foreign competition. If foreign goods and
services easily enter the domestic market, it increases domestic competition.
 Keeping infant industries until they become mature and internationally competitive. Some
countries want to make sure their strategic industries thrive. Such industries usually contribute to
national security, employment, technology, or value chains with various other industries.
 Securing domestic employment and income. Imports benefit foreign producers as money flows
from domestic to them. Besides, when imports increase, they will increase production. It creates
jobs and income in their country but not domestically.
 To generate government revenue. By imposing import tariffs, the government obtains a source
of income other than individual taxes or business taxes.
 Retaliating for similar restrictions imposed by trading partners. Countries do not like unfair
trade practices by their partner countries, for example, dumping. Hence, it is in their interest to
get even with the partner country.

Import tariffs
Import tariffs are taxes on imported goods from abroad. The tariff’s effect is to increase the price
of imported products when they enter the domestic market.

Import quota
Quotas limit the quantity of goods entering the domestic market. Quotas reduce supply. If
domestic producers cannot compensate by increasing output, quotas create shortages (excess
demand). As a result, the price of domestic goods rises.

License
Some countries use import or export licenses to restrict trade. To ship foreign goods into the
domestic market, importers must obtain a license.
The government can limit the granting of import licenses. The government may not issue
licenses for certain products from certain countries for specific purposes.

Standardization
Standardization can take many forms, including standards for health, environmental safety, and
local content requirements. To limit imports, the government can raise standards and reduce the
number of products that fulfill them.

Subsidy
Subsidies work in reverse with import tariffs. Instead of imposing import duties, the government
provides grants to domestic producers to encourage exports.

Higher price
Trade barriers increase costs and selling prices. For example, when tariffs apply to consumer
products, domestic buyers have to pay more