Types of Elasticity in Economics and Evaluation of Usefulness

This document provides an in-depth explanation of the three types of elasticity in economics and how to calculate them. It also critically evaluates the usefulness of the concept of elasticity in economics. The document covers both microeconomics and macroeconomics topics.

ECONOMICS

Table of Contents
INTRODUCTION...........................................................................................................................3
MICROECONOMICS.....................................................................................................................4
Question 1:...................................................................................................................................4
a) Explain in detail three types of elasticity’s in economics and how it can be calculated.....4
b) Critically evaluate the usefulness of the concept of elasticity’s..........................................6
MACROECONOMICS...................................................................................................................8
Question 4....................................................................................................................................8
a) Explain each of the components of aggregate demand (GDP)............................................8
b) Is GDP a good measure of the well being of a nation?.....................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Economics is the branch of social science under which the production, distribution, exchange
and consumption of goods and services are studied. The systematic knowledge of human actions
in relation to a subject is called the scripture of that subject, so in economics it is necessary to
have systematic knowledge of the work related to human beings. Microeconomics is a branch of
microeconomics that studies how the individual components of the economy, families and firms
decide to allocate limited resources, especially in markets where goods and services are bought
and sold. On the other hand, Macroeconomics is the branch of economics that focuses on the
behavior and performance of aggregate variables and the issues that affect the entire economy. In
this project report these two sectors of economics will cover details of three types of elasticity’s
in economics and evaluation of usefulness of concept of elasticity of price and demand done.
Report also covers the concept and components of GDP and also explanation about whether it is
good measurement for whole nation.

MICROECONOMICS
Microeconomics examines how these decisions and behaviors affect the supply and demand for
goods and services, which determine prices and how, in turn, determine the supply and demands
of prices, goods and services Does. Microeconomics is the branch of economics that focuses on
the behavior and performance of individual units, i.e. consumers, families, industries, firms
(Krugman, 2008). Microeconomics is a branch of economics that studies how the individual
components of the economy, families and firms decide to allocate limited resources, especially in
markets where goods and services are bought and sold. Micro Economics examines how these
decisions and behaviors affect the supply and demands of goods and services, which determine
prices and how, in turn, the value, supply of goods and services and determines the demands.
Question 1:
a) Explain in detail three types of elasticity’s in economics and how it can be
calculated
By 'elasticity', it means having the power to move the knee in something. For example, rubber is
called elastic, because it increases when the pressure is applied and shrinks when the pressure is
removed. Elasticity depends on two things; the nature of the object and the pressure exerted on it.
If the nature of an object is not flexible, it will increase even if there is a lot of pressure. The
same is with respect to the demand for goods. Some items are such that price changes have a
great impact on their demand, while some commodities have less impact on demand, if the
change of price has a greater impact on the demand of an item, it is called 'elastic in economics
Demand 'and if price changes have no effect on demand. From this flexibility test we can use the
relationship between the elasticity of total revenue estimate and total revenue. Estimates of
demand by the Total Revenue Test (total revenue test) are a method to follow changes in total
revenue from price movements arising from price elasticity (all other factors remain unchanged
sales). There are three types of elasticity of demand:
1. Equal to Unit Elasticity or Unitary elasticity:
If the total expenditure remains constant even when there is an increase or decrease in price, then
the elasticity of demand is equal to the unit. In other words, if both the expenditure amounts after

the price change and before the price change are equal, then the elasticity of demand is equal to
the unit (Ehrenberg, R.G. and Smith, R.S., 2016).
2. Greater than Unit Elasticity or perfectly inelastic:
The total expenditure increases when the price decreases or the total expenditure decreases when
the price increases, then the elasticity of demand will be greater than the unit. In other words,
when price changes and aggregate expenditure changes move in the opposite direction, the
elasticity of demand is greater than the unit.
3. Less than Unit Elasticity or perfectly elastic:
If the total expenditure decreases when the price decreases or the total expenditure increases
when the price increases, then the elasticity of demand is less than the unit. In other words, when
price changes and total expenditure changes always move in the same direction, the elasticity of
demand is less than the unit (Bailey, 1995).
% change in quantity > % change in price Computed Elasticity > 1 Elastic
% change in quantity = % change in price Computed Elasticity = 1 Unitary
% change in quantity < % change in price Computed Elasticity < 1 Inelastic

Formula for calculating elasticity of demand:
Elasticity = % change in quantity/ % change in price
Where;
Q1 = Normal quantity
Q2 = Increase or decrease in quantity
P1 = Normal price
P2 = Increase or decrease in price
When the price changes, demand remains unchanged, then the price elasticity of demand is zero,
we say there is such a complete lack of product price elasticity of demand (perfectly stable
demand). The price elasticity of demand is very low when insulin products (probably zero in a
certain price range). Insulin is very important for some people with diabetes, so even if the price
has increased or decreased, they do not change their purchase. When the slightest price change,
then the price elasticity of demand is infinite, the demand is infinitely large percentage of the
response, we say the absolute price elasticity (fully elastic demand) of the demand for this
product.
b) Critically evaluate the usefulness of the concept of elasticity’s
Elasticity is very useful on various occasions where different scenario analyses have to be done;
some the usefulness of the concept of elasticity is discussed below:
1. Usefulness in international trade: This idea is very helpful for the terms of trade between any
two countries. Bargaining power in international trade and the profit received depends on the

mutual demand and elasticity of the goods to be imported and exported (Downward, Dawson and
Dejonghe, 2009).
2. Usefulness in distribution: The idea of elasticity of demand is also helpful in determining
reward for various means of origin. If the demand for any instrument in the origin is favorable,
then its high worth can be attained. Conversely, an instrument whose demand is elastic is given
less rewards.
3. Usefulness in Revenue: This idea is used by the Finance Minister in two places, one for
getting more tax and the other for equitable distribution of tax burden on the society.
4. Usefulness in pricing - The elasticity of demand in pricing has a great impact. It is generally
said that the value of demand and supply has an important hand in the pricing of an item, but the
elasticity of demand for information about the fluctuations in the value of the commodity when
the supply increases and decreases.
5. Usefulness for monopolies: Monopolistic studies the elasticity of demand when determining
the price of a commodity. If the demand for the goods produced is favorable, then it will sell in
small quantities with a high price. If the object's mobility is elastic, it will sell in large quantities
at a lower price. Monopoly also takes the help of this idea in price differential (McCarthy, 2001).
6. Usefulness in fixing freight rates: This ideology also helps in deciding the freight rates of
traffic. The rates of freight for which demand is inelastic will be higher. Conversely, those whose
demand will be elastic, their hire rates will be lower.
Usefulness in Tax burden:
Observation of elasticity determines that a tax burden is inherently on the question of what is
shared between consumers and producers. The answer is that the relative burden of a tax on
producers versus consumers corresponds to the relative price elasticity versus price elasticity of
supply demanded.
When supply is more elastic than demand, consumers will incur a tax burden more than
producers will. For example, if supply is twice as elastic as demand, producers will incur one-
third of the tax burden and consumers will have to bear two-thirds of the tax burden.

MACROECONOMICS
Macroeconomics is the branch of economics that focuses on the behavior and performance of
aggregate variables and the issues that affect the entire economy. It includes regional, national
and international economies and covers key sectors of the economy such as unemployment,
poverty, general price levels, GDP (GDP), imports and exports, economic development,
globalization, monetary / fiscal policy, etc. This helps in solving various problems of the
economy, enabling it to function efficiently (Thirlwall and Pacheco-López, 2017).
In macroeconomics, all the economic variables of an economy are considered. It also discusses
the diverse inter-linkages that exist in various sectors of the economy. It is for this reason that it
differs from microeconomics; In which the methodology is tested in a particular sector of an
economy and other sectors of the economy are treated as uniform.
Question 4
a) Explain each of the components of aggregate demand (GDP)
Aggregate demand is the demand for all goods and services throughout the economy. It is a
macroeconomic period that describes the relationship between everything purchased in the
country and prices. Things purchased in a country are the same thing as everything produced in a
country. Therefore, aggregate demand equals GDP of that economy (Takata, 2016). Components
of Gross development product (GDP) are discussed below:
AD = C + I + G + (X-M)
It describes the relationship between demand and its five components.
Aggregate demand = consumer spending + investment expenditure + government spending +
(export-import)
Consumer Spending: It is the ability of people to purchase product or services from the market; it
also indicates purchasing power parity or PPP of the customer. This component impacts the
rotation of cash in a country. As in case of more spending, more cash will be available in the

market and more production by manufacturer. It is determined through customer expenditure
survey (CES) which includes estimates of monthly per capita; consumption estimate; people's
preferences over demand and goods and services in an economy.
Apart from this, it shows the standard of living and economic growth of people on various scales.
It identifies structural anomalies and proves helpful in formulation of economic policies that can
detect demand patterns and help producers of goods and services.
Investment expenditure: It indicates the production of finished goods and services by
manufacturer. Only finished goods which are ready for consumption or not for further sale are
considered to calculate investment expenditure.
Government spending: This includes percentage of contribution by government for economic
growth of the nation. Government basically tries to improve its basic infrastructure like bridges,
roads, railway tracks and metro to facilitate trade and transport services for development of
nation.
Export / Import: Purchasing goods from outside nation is known as import and selling goods
outside the nation is known as export. It is measured in the form of surplus or deficit in a balance
sheet known as balance of trade. More exports than import shows favorable balance or surplus.
Export and Import is recorded in separate Current Account; where more import shows negative
balance and more exports shows positive balance in the account.
Under the current account, there are mainly three types of transactions, the first is the import-
export of goods and services and the second is the income and expenses from employees and
foreign investment and the third is the current transfer (grant money from abroad, gifts and
workers settled abroad). Fluctuations in the current account deficit also have an impact on the
growth rate of gross domestic product (GDP). This is the main reason why it is expressed as a
percentage of GDP. It is noteworthy that trade deficit is the largest part of CAD.
The Central Statistics Office (CSO) collects data on production and services from across the
country. The process consists of several indices, mainly the Industrial Production Index ie IIP
and Consumer Price Index i.e. CPI. The CSO coordinates with various central and state agencies

and collects data. For example, the Ministry of Consumer Affairs collects the figures of
manufacturing, agricultural products to calculate WPI and CPI.
Similarly, the IIP figures are collected by the Department under the Ministry of Commerce and
Industry. The CSO collects all these figures and then calculates and releases the GDP figures.
Data are collected mainly from eight industrial areas. These are agriculture, mining,
manufacturing, electricity, construction, trade, defense and other services.
Example:
Where the United States provides its services, it imports goods that can be manufactured abroad
more efficiently. These include industrial supplies, oil, telecommunications equipment, autos,
clothing and furniture. United States has lost a competitive edge in the production of these
products, and has become a service-oriented economy, demand drives economic growth, and
demand drives growth. It works in this way; as income increases, people can buy more. As
people buy more, companies can earn more, and then pay more to employees. The ideal situation
is healthy growth with moderate inflation.
b) Is GDP a good measure of the well being of a nation?
GDP is the most important measure to measure the economic health of any country. GDP is the
total value of production of goods and services during a particular period. GDP is calculated on a
quarterly basis every third month. The thing to note is that these production or services should be
within the country itself (De Moraes and de Mendonça, 2017). To know whether GDP effect
well being or not; impact of bad GDP is discussed below:
1. Steady decline in economic growth: If the growth rate or GDP of an economy is continuously
decreasing quarter-on-quarter, then it is considered a big sign of economic slowdown. Growth
rate is the rate of increase in the economy of a country or production of a particular region.
2. Decline in consumption: Another big sign of economic recession is that people reduce
consumption. During this time, the sale of homes and vehicles decreases along with common
things like biscuits, oil, soap, and cloth, metal. Actually, during the recession, people try to
control the expenditure on the things of need.

3. Decline in industrial production: If the wheel of industry stops in the economy, new products
will not be created. The private sector plays a big role in this. During the recession, the
production of industries would have reduced. The mills and factories are locked, as the sales in
the market decrease.
4. Unemployment increases: Employment opportunities decrease when the economy is slowing
down. Due to lack of production, industries are closed, there is no transportation, and sales are
halted. Because of this, companies start to lay off employees. This increases unemployment in
the economy.
5. Stock market crash: In the stock market, shares of the same companies increase, whose
earnings and profits are increasing. If the earnings estimates of companies are continuously
decreasing and they are not able to meet the expectations, then it is also seen as an economic
slowdown. Their margins, profits and performance continuously decrease.
From the above discussion it can be concluded that; GDP measures economic growth of any
country and well being of each country is dependent on its economic growth and money. Thus
GDP is the good measure of the well being of the nation.
Recommendations by GDP to improve economic condition of US:
 Policy makers need to adopt innovative efforts to promote export trade.
 It is noteworthy that due to GST, the working capital shortage of small exporters has
badly affected exports.
 In such a situation, there is a need to work to woo some labor-intensive supply chains of
countries like Vietnam and Bangladesh coming out of China.
 It is an irony that despite the abundance of coal reserves, thermal coal is one of the fastest
growing imports in India. This is a result of low investment in modernizing the entire
coal production and utilization chain which should be taken into account at the earliest.
 Due to rising oil prices, the import of oil will be expensive, due to which the inflation rate
in India is likely to increase. Increased inflation rate will also affect basic and other
infrastructure.
 Therefore, the government will need to be quick to reduce structural imbalances to
increase CAD to more than 3% or even more of GDP.

CONCLUSION
Thus from the analyses and finding from project report, it can be concluded that; demand plays
an important role in determining the quantity and value of the product, along with the price and
quantity of the related goods (complementary goods) and substitute products, so that their
alternative use to make a judicial decision regarding the allocation of scarce resources. GDP is
presented in two ways; because the cost of production keeps on fluctuating with inflation, this is
the measure of the cost price. Under this, the rate of GDP and the value of production are
decided on the price of production in a base year.

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