Types of Elasticity in the Economy and How to Calculate

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Exam

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Question 1........................................................................................................................................1
1. Explain three different types of elasticity in the economy and how it should be calculated...1
Question 3........................................................................................................................................5
1. Explain that how commercial banks generate money.............................................................5
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Economic theories is the easiest and concise description of how social hierarchy the scarce
resources. It is a social science associated with products and services being generated, circulated,
and consumed. Macroeconomics is the field of sociology researching a national economy's
overall working (Ibanez And et.al., 2018). In particular, economies can be subdivided into
macroeconomics that focuses on world economy behaviour and microeconomics focuses on
individual customers and enterprises. This assessment is based on two questions which help the
students to improve their learning and knowledge. A first question is based on different type of
elasticity that is based on the change of demanded quantity over change in price. There are major
four types but this report discussed about major three such as price elasticity of demand (PES),
price elasticity of supply (PES) and at the end, income elasticity of demand (YED). In addition,
second question is based on how commercial banks generate money.
MAIN BODY
Question 1
1. Explain three different types of elasticity in the economy and how it should be calculated
Elasticity is a core economic principle and it applicable in many cases. Simple analysis of
demand and supply describes why economic factors, such as size, income and productions are
consistently related. Elasticity may provide valuable knowledge about the power of these
partnerships or their vulnerability. It refers with one sensitivity economic factor such as the
required quantity to a transition in some other variable such as price.
Economic experts use price elasticity to explain how supply or demand adjusts and
understand the complexities of the financial market, despite price changes. For example, certain
goods are rather inelastic, because their prices don't change at all with increases in supply or
demand (Liu and Yu, 2018). People want to buy fuel to get to work or fly across the world, and
even if oil prices increase, people are going to purchase exactly the same amount of petrol again.
Similarly, other commodities are very dynamic, creating significant changes in their demand or
availability due to their price fluctuations.
There are majorly four types of elasticity but this report discussed about only three type of
elasticity which helps in measuring relationship between two factors and it’s discussed below:
1

Price elasticity of Demand (PED): Price elasticity is an indicator of economic to the
increase in the amount a commodity demands or consumes in response to the increase in price. It
is a means of working out market sensitivity to demand variations. If a good's price elasticity is
less than 1 it is termed as inelastic (Sevilla and Huerta, 2018). That indicates a price increase of
one unit resulting in a demand decline of less than one unit. Similarly, if there is more than one
coefficient (the absolute value) the goods are elastic. Which means a price increase unit would
trigger demand to sink even further. In this concept, profits is greatly increased if the price
elasticity of a product is equal to 1, or, in other words, if demand is elastic unit.
Formula:
PED = % change in demanded quantity / % change in price
Calculation:
For example: Demanded quantity of any goods increases from 2800 to 3000 but price of
the product decreases from 70 to 60. Calculate the price elasticity of demand between two points
such as A and B and it mentioned in the below graph:
Point P Q
A 60 3000
B 70 2800
C 80 2600
D 90 2400
E 100 2200
F 110 2000
G 120 1800
H 130 1600
PED = % change in quantity / % change in price
= 6.9% / -15.4%
= 0.45
Working Notes:
% change in quantity = (3000 – 2800) / {(3000+2800)/2} * 100
= 200 / 2900 * 100
= 6.9
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