Different Types of Elasticity in Economics

Economics

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
CONCLUSION..........................................................................................................................7
REFERENCES...........................................................................................................................9

INTRODUCTION
Economics is the study of mankind in an ordinary business life. It is concerned with
the production, distribution and consumption of goods and services. It studies how the
businesses, individuals and the nation as a whole makes choices on allocating resource in
order to satisfy their needs and wants. Economics is divided into two, microeconomics and
macroeconomics. Microeconomics focuses on the individual consumers and businesses
whereas macroeconomics focuses on the aggregate economy as a whole. This report presents
about the different types of elasticity and its usefulness. It also covers how commercial bank
creates money and the measures taken by central bank to limit its ability.
MAIN BODY
1.
a) Different types of elasticity in economics
The quantity of the product demanded per units is dependent upon the various factors
such as price of the commodity, price of the related goods, taste and preference of the people
etc. Any change in these factors will bring change in the quantity of product purchased over a
specific period. In economics, elasticity refers to the change in the demand and supply of the
product with respect to change in consumer income or price of the product. The three main
types of elasticity are stated below.
Price Elasticity of Demand
The price elasticity of demand refers to the degree of responsiveness of quantity
demanded to change in relation to change in price (Slater, 2018). In other terms, it is the
proportion of change in quantity demanded of the product caused by the given proportionate
change in the price of the product.
The formula for calculating price elasticity of demand is
Price elasticity of demand = % change in the quantity demanded / % change in price
Ed = Δq X P
Δp Q
For example, the price of the good fall from £10 per unit to £9 per unit. The decline in price
has led to the increase in demand from 125 units to 150 units. The price elasticity will be
calculated as:
Δq = 150-125= 25
Δp = 10-9= 1
Original quantity = 125
Original price = 10
Ed = 25/1*10/125 = 2
The elasticity of demand is greater than 1 which means demand for good is elastic.