Elasticities in Economics and Commercial Banks' Money Creation

This report discusses the three types of elasticities in economics, including price, income, and cross elasticity, and how commercial banks create money through loans and interest. It also explores the measures used by central banks, such as changing short-term interest rates, modifying reserve requirements, and conducting open market operations, to limit the ability of commercial banks to create money.

Economics

Contents
INTRODUCTION...........................................................................................................................................3
MICROECONOMICS.....................................................................................................................................3
QUESTION 1.................................................................................................................................................3
Explain in detail three types of elasticities in economics and how it can be calculated..........................3
(b) Critically evaluate the usefulness of the concept of elasticities.........................................................5
MACROECONOMICS....................................................................................................................................6
QUESTION 3.................................................................................................................................................6
(a) Discuss how commercial banks create money...................................................................................6
Discuss the measures used by the Central Banks to limit this ability......................................................8
CONCLUSION...............................................................................................................................................9
REFERENCES..............................................................................................................................................10

INTRODUCTION
Economics is described as a method or instrument for combining most wants, which are
referred to as a positive, with available budgets, which are referred to as a debit. It's all about
business to maintain a suitable and sustainable balance between the different words. It is one of
the most fundamental economic concepts. Besides that, depending on the circumstance, we have
multiple core concepts of Economics (Anderson, Asche and Garlock, 2019). It has 2 types prior
getting to the principles of economics, Macroeconomics and microeconomics, to be precise. In
this report consist of different questions those categories into macro economics and macro
economics.
MICROECONOMICS
QUESTION 1
Explain in detail three types of elasticities in economics and how it can be calculated
Elasticity is a measurement of a variable's responsiveness to a dependent variable, most
frequently the variation in amount requested in resulting from changes in other parameters,
including pricing. The extent to which people, customers, or manufacturers adjust their desire or
the levels which allow in reaction to pricing or annual income is referred to as price elasticity in
finance and economics. It's mostly used to figure out how much a modification in a product's or
service's pricing affects customer desire.
It is considered to be 'completely' inelastic if elasticity = 0, implying that demand will stay
constant regardless of price. Perfectly inelastic items are unlikely to exist in the actual world.
Whether there was, manufacturers and distributors could pay anything they wanted, and
customers still would have to purchase them. Even air and water, since no one has command
over, come close to being perfectly inelastic goods (Dolfin, Leonida and Outada, 2017).
Price elasticity: The quantity requested for a product is affected through any rise in the
value of commodities, if it's a drop or a rise. Whenever the value of ceiling fans rises, for
instance, the number of fans purchased decreases. The Price Elasticity of Demand is a metric that

measures how sensitive a quantity desired is to a change in value (PED). Price Elasticity of
Demand is calculated using the following mathematical equation:
PED = % Change in Quantity Demanded % / Change in Price
The product is said to be unit elastic when a change in the value corresponds to a corresponding
increases in the quantity requested. The amount required changes by X% when the price changes
by X%. As a result, the good is units elastic whereas if price elasticity is one. When a product
has unitary elastic desire, the volume and pricing effects are equal.
Income elasticity: The responsiveness of the demand curve for a given item to changes
in real income of the people, who purchased it, all the other factors being equal, is referred to as
income elasticity of demand. The percentage change in price requested direct proportion to
changes in revenue is the equation for estimating income elasticity of demand. They can identify
whether a product is a requirement or a luxury by looking at the income elasticity of demand
(Banzhaf, Ma and Timmins, 2019).
YED = % Change in Quantity Demanded% / Change in Income
Economics can determine ordinary and substandard commodities, and how sensitive the amount
sought is to variations in revenue, by measuring the income elasticity.
Cross elasticity: Numerous companies are competing in a marketplace when there is an
oligopoly. As a result, the quantity requested for a commodity is affected not only by its own
cost, but also by the pricing of other items. Cross Elasticity of Demand, abbreviated as XED, is
an economic question that evaluates the sensitivity of the amount requested of one item (X)
whenever the value of another product (Y) changes. This is also known as Cross-Price Elasticity
of Demand. The method of calculating Demand Cross Elasticity is as follows:
XED = (% Change in Quantity Demanded for one good (X)%) / (Change in Price of another
Good (Y))
The cross-price quantity demanded is a metric that quantifies how a rise in the value of one
product affects desire for that other. It's determined by dividing the price increase of Quantity A
by the price change of Quantity B.

(b) Critically evaluate the usefulness of the concept of elasticities
Elasticity is a measurement of a variable's sensitivity to a change in demand in the
economy. Elasticity is a measurement used by economist to determine how factors interact.
Price, cross-price, and income effect are the three basic types of elastic. Demand and supply
elasticity can come in handy in a number of situations. It can help you comprehend income taxes,
margin ideas in company theory, income disparity and various varieties of commodities in
consumers' purchase theory (Baldwin and Milner, 2019). In either consideration of network
consists, particularly consumer excess, quantity supplied, or budget surplus, elasticity is critical.
In academic research, elasticity is defined as the estimated parameter in a linear equation where
both the variables involved are normal records. Elasticity is a common technique among
materialists since it is unitless, making data processing easier.
In particular, a link among demand and total sales can be discovered. When total sales
represent the amount of funds made from the sale of a certain number of items, for example,
understanding elasticity may help forecast how overall revenue will behave when prices vary.
Assuming a sufficiently elastic demand condition for a commodity, an inverse connection among
demand and net revenue is predicted whereas if price is raised. However, when demand is
somewhat inelastic, an indicated that qualitative among demand and net revenue is predicted as a
consequence of price decrease. Similarly, whereas if pricing of a product rises or falls and desire
is unitary elastic, the demand-to-total-sales connection remains unchanged.
Use of price elasticity of demand: Some items' pricing are particularly inelastic, according to
researchers. That seems to be, a price drop does not significantly boost demand, and a price rise
does not significantly decrease demand. For instance, Petroleum has a low price elasticity of
demand. Airports, the transportation sector, and practically any other consumer will keep on
buying more than they need to. Other items are significantly highly elastic; therefore price
movements induce significant market changes or availability for these products (Gills and
Morgan, 2021).
Use of income elasticity of demand: The demand for required items has a low elasticity of
supply. As a result, during times of prosperity, merchants of such things are unaffected, and

during periods of recession, they are unaffected. Customer income rises during times of
prosperity, allowing them to purchase more expensive things. Manufacturers of such things gain
from it. Throughout a downturn, interest for such items drops significantly, putting vendors at a
disadvantage.
Use of cross elasticity of demand: Whenever a business (producer) has an understanding of the
likely future pricing of replacement or complimentary items, cross elasticity can be utilised to
better predict desire for his item. The cross - price elasticity is an accounting measure that
assesses how sensitive the amount desired of one commodity is to variations in the pricing of
some other product. Since desire for one product rises as the cost for the alternative good rises,
the cross - price elasticity for alternative products has always been high. Preference for
complimentary commodities, on the other hand, has a lower cross elasticity of demand
(Ichihashi, 2021).
MACROECONOMICS
QUESTION 3
(a) Discuss how commercial banks create money
Commercial banks are those which offer money transfer account management, as well as
loans to the wider populace. The almost certainly interact with a commercial bank on a constant
schedule. Commercial banks generate money through a number of means, include charges,
payment card interests, mortgages, and additional contribute.
The bank multiplication allows commercial banks to issue currency or credits upon funds.
By credits, they imply banking loan facilities to the general population. Furthermore, the
production of cash or credit relates to the growth of borrowings. Because 'each loan produces a
deposit,' credit expansion by financial institutions pertains to the expansion of initial financial
assets. As a result, "banks are not just distributors of currency and yet also, in an essential
measure, makers of money." Business generates deposits via borrowing. Rather than making
money repayments, banks issue checks in the customers' names. The debtor may now access his
funds by writing checks to institutions. The recipients of the checks lodge them at a different
bank. The financiers, on the other hand, are aware that the income that customers remove quickly
returned to the institution (Teece, 2019).

Commercial banks provide loans to current customers of purchase of vehicles, housing,
borrowings, mortgage loans, and lines of credit. The funds for such mortgages are drawn first
from bank's other customers' accounts. Because the bank expects those resources to stay
stationary for a length of time, it lends a specific dollar amount toward others, who are then
anticipated to pay back their loans plus interests. Commercial banks generate money by giving
and collecting interest on money including loans, vehicle lending, borrowings, and consumer
lending. Bank reserves give bankers with the money they need to issue such mortgages.
Commercial banks perform a significant role in the economy as'money creators.'
Companies have the opportunity to produce credits via deposit accounts. Such customer deposits
generate credit in excess of the originating payments. To illustrate the concept of money
production, use the case study: Assume a client puts £10,000 in a bank XYZ's savings account,
which becomes the bank's desire deposit. Predicated on the assumption that not every clients
would arrive at the same time to take their savings, banks keep a minimal financial cushion of
10% of bank reserves, or Pound 10,000. It extends credit to other clients for the balance Pound
9000. This generates additional contributions for the bank XYZ. With such a cash position of
Pound1000, the credit expansion is worth Pound 10,000 (Heckman and Singer, 2017).
Commercial banks provide normal banking assistance to customers and small and mid
enterprises, such as cash deposits and mortgages. Commercial banks gain money through a range
of fees as well as interest revenue from mortgages. Commercial banks have generally been
physically based, but a rising proportion now functions purely digital. These banks play a
significant role in the economy since they generate capital, lending, and stability in the
marketplace. Banks generate money through service costs and fees. Accounts costs (recurring
monthly fees, minimum purchase fees, overdraft charges, non-sufficient funding (NSF)
penalties), safety deposit service charges, and service charges all vary depending on the type.
Several loan packages include fees in additional to interest rates.
Bankers also profit from the income they collect by making loans to these other customers.
The monies they lend are derived from consumer deposits. Nevertheless, the rate of interest main
refinancing on funds loaned is lower than the cost of borrowing levied on banks lends. For
example, a bank may give 0.25 percent yearly interest on savings accounts despite collecting
4.75 percent annual rate of return on mortgages. Banks produce the majority of money in system,

in the form of financial deposits the figures in their accounts. While bankers provide mortgages,
they generate fresh money. Nowadays, financial assets account for 97 percent of all spending in
the market, with actual currency accounting for only 3 percent (Carrasco-Gallego, 2017).
Discuss the measures used by the Central Banks to limit this ability.
The central bank would have been the heart of a country's economy if this were a human
body. While, just as the heart is working to circulate existence blood to the entire body, the
central bank circulates back into the market to maintain health and thriving. Oftentimes
economies require lesser cash, but sometimes they require more. The techniques used by
financial institutions to regulate the supply of money differ based on the economy and the central
bank's authority. The Federal Reserve, sometimes known as the Fed, is the central bank of the
Country. Other notable central banks include the Banking System, the Swiss Commercial Bank,
the Bank of England, the People's Bank of China, and the Bank of Japan.
To raise or reduce the quantity of money in the financial system, central banks employ a
variety of strategies. Financial system is the term used to describe these acts. Whereas the
Federal Reserve Board, often known as the Fed, has the authority to manufacture bank notes at
its choosing in order to expand the quantity of money in the system, this is not the method
working in the United States.
Changing short term interest rate: By adjusting brief borrowing costs, the Fed can also influence
the monetary base. The Fed is able to successfully boost (or reduce) the availability of cash by
decreasing (or rising) the interest amount that corporations charge on brief borrowing as from
Federal Reserve Bank. Lower interest rates improve the monetary supply and stimulate
economic growth; nevertheless, lower interest rates feed inflationary, so the Fed must tread
carefully.
Modify reserve requirement: The Fed can impact the supply of money by changing bank
reserves, which relate to the sum of money institutions must retain alongside financial assets.
Banks have been able to borrow additional cash when margin requirement are reduced,
enhancing the total amount of spending in the market. The Fed, on the other hand, can reduce the
quantity of the monetary base by boosting institutions' bank reserves (Boustan and Langan,
2019).

Conducting open market operations: Finally, the Fed may influence the money supply through
financial markets, which influences the cost of borrowing. The Fed resells governmental bonds
on the open market as part of its efficiency. The Federal Reserve buys government bonds to
enhance the supply of money. This increases the total money supply by providing cash to
commodities people who are selling the securities. Whereas if Fed intends to lower the interest
rate, it transfers securities out of its accounts, bringing cash into the economy and withdrawing it
from circulation. The Federal Reserve's decision to raise or lower the fed funds rate is an eagerly
awaited economic issue.
Monetary policy: Central banks change the money supply, usually via quantitative easing, to
implement fiscal system. For example, a central bank might cut its money supply by trading govt
bonds underneath a "sales and buyback" deal, allowing it to borrow from financial institutions.
The goal of financial markets like these is to impact quick borrowing costs, which in eventually
impact lengthier pricing and economic growth rate. The conduct of monetary policy is not as
successful as it is in developed economies in many nations, particularly low-income ones.
Nations should build an interface to support the banking system to move from macroeconomic to
controlling inflation prior making the switch.
CONCLUSION
As per the above report it has been concluded that the analysis of how community
distributes limited resources for the company is known as economy. The elements are culture
employs to create output, or products, are referred to as assets. Work, money, and land are
examples of supplies. Food, clothes, and shelter are examples of goods, as are stylists',
physicians', and law enforcement officers' activities. Due to society's proclivity for demanding
more resources and things than are accessible, those assets and commodities are deemed limited.

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