Arc elasticity is a measure of how much one variable changes in response to a change in another variable, and is calculated as the percentage change in the dependent variable divided by the percentage change in the independent variable. It is often used to measure the responsiveness of demand or supply to changes in price.
For example, if the price of a good increases by 10% and the quantity demanded decreases by 20%, then the arc elasticity of demand would be -2 (-20% ÷ 10%). This means that demand is relatively inelastic, as a 10% increase in price led to a relatively small decrease in quantity demanded.
What are the three ways to calculate elasticity of demand? There are three ways to calculate elasticity of demand:
1. The percentage change in quantity demanded divided by the percentage change in price.
2. The percentage change in quantity demanded divided by the percentage change in income.
3. The percentage change in quantity demanded divided by the percentage change in price, taking into account the income and substitution effects.
What do you understand by price elasticity of demand?
Price elasticity of demand refers to how responsive consumers are to changes in prices. If demand is price elastic, then consumers will purchase less of a good when prices increase. If demand is inelastic, then consumers will purchase the same amount of a good even if prices increase.
What are the types of elasticity of demand? There are four types of elasticity of demand:
1. Price elasticity of demand – this is a measure of how demand for a good or service changes in relation to price changes. If demand is price elastic, a small change in price will lead to a large change in demand. If demand is price inelastic, a small change in price will lead to a small change in demand.
2. Income elasticity of demand – this is a measure of how demand for a good or service changes in relation to changes in income. If demand is income elastic, a small change in income will lead to a large change in demand. If demand is income inelastic, a small change in income will lead to a small change in demand.
3. Cross elasticity of demand – this is a measure of how demand for a good or service changes in relation to changes in the price of a substitute or complementary good or service. If demand is cross elastic, a small change in the price of a substitute or complementary good will lead to a large change in demand. If demand is cross inelastic, a small change in the price of a substitute or complementary good will lead to a small change in demand.
4. Advertising elasticity of demand – this is a measure of how demand for a good or service changes in relation to changes in advertising expenditure. If demand is advertising elastic, a small increase in advertising expenditure will lead to a large increase in demand. If demand is advertising inelastic, a small increase in advertising expenditure will lead to a small increase in demand.
What are the 5 determinants of price elasticity of demand? 1. The nature of the good or service being demanded:
Some goods and services are necessities, meaning that consumers will continue to demand them even when prices increase. Other goods and services are luxuries, meaning that consumers will be more likely to reduce their consumption when prices increase.
2. The time frame being considered:
In the short-term, consumers may be less responsive to price changes than in the long-term. This is because they may be more reluctant to change their consumption habits in the short-term, even in response to price changes.
3. The availability of substitutes:
If there are close substitutes for a good or service, then consumers will be more price sensitive and the demand will be more elastic. For example, if there are two brands of toothpaste that are very similar, then consumers are likely to switch to the cheaper brand if the price of one brand increases.
4. The income of consumers:
Generally, the higher the income of consumers, the more elastic their demand will be. This is because high-income consumers have more disposable income and are therefore more likely to be able to afford to switch to a more expensive good or service if the price of the good or service they are currently using increases.
5. The proportion of income spent on the good or service:
If a good or service represents a large proportion of a consumer's income, then the demand for that good or service is likely to be inelastic. This is because consumers are unlikely to be able to reduce their consumption of the good or service by a significant amount if the price increases. What are the three factors that determine the elasticity of supply? There are three main factors that affect the elasticity of supply:
1. The time frame involved: If a good can be produced quickly in response to an increase in demand, then the supply will be more elastic than if it takes a long time to produce more of the good.
2. The number of suppliers: If there are many suppliers of a good, each of them will be able to respond to an increase in demand by producing more of the good, and so the supply will be more elastic.
3. The costs of production: If it is expensive to produce more of a good, then the supply will be less elastic, as suppliers will be less willing to increase production in response to a higher demand.