Elasticity Of Demand And Supply

The demand elasticity (elasticity of demand) is a term used in economics to describe how sensitive a good's demand is to changes in other economic variables such as prices and consumer income. The percent change in the quantity demanded divided by the percent change in another economic variable is how demand elasticity is calculated. Consumers who have a higher demand elasticity for an economic variable are more responsive to changes in that variable. The following formula can be used to express demand elasticity (Ed).

 

Ed= % Change in Quantity Demanded

 

% Change in the Economic Variable

 

The price elasticity of demand is a common type of demand elasticity that shows how responsive the quantity demanded for a good is to a change in its price. Firms collect information on price changes and how consumers react to them. Then, in order to maximise profits, they adjust their prices accordingly. Cross-elasticity of demand is a type of demand elasticity that is calculated by dividing the percent change in quantity demanded for one good by the percent change in price for another good. This elasticity measures how a good's demand responds to price changes in other goods.

 

In most cases, demand elasticity is measured in absolute terms. It is elastic if demand elasticity is greater than one: Economic changes have an impact on demand (e.g., price). Inelastic demand is defined as demand that does not change in response to economic changes such as price changes. When the absolute value of demand elasticity is equal to 1, demand moves proportionately with economic changes.

 

The supply elasticity (elasticity of supply) is a term used in economics to describe how sensitive a good's supply is to changes in other economic variables such as prices, subsidies, and taxes. The elasticity is defined as the percentage change in the quantity supplied divided by the percentage change in the economic variable in numerical form. The following formula can be used to calculate supply elasticity (Es).

 

Es= % Change in Quantity Supplied

 

% Change in the Economic Variable

 

When the elasticity is less than one, the supply of the good is said to be inelastic; when the elasticity is greater than one, the supply is said to be elastic. The good is said to be unit-elastic if the elasticity is exactly one.

 

It is not uncommon to come across situations in which the government sets a maximum allowable price for specific goods. A price ceiling is a government-imposed upper limit on the price of a good or service. Price ceilings are commonly imposed on essential items such as wheat, rice, kerosene, and sugar, and they are set below the market-determined price because some people will be unable to afford these goods at the market-determined price. Let's look at how a price ceiling affects market equilibrium using the wheat market as an example.

 

p* and q* are the equilibrium price and quantity of wheat, respectively. Consumers demand qc kilogrammes of wheat, while firms supply qc'kilograms, when the government sets a price ceiling at pc, which is lower than the equilibrium price level. As a result, at that price, there will be an excess demand for wheat on the market.

 

As a result, even though the government intended to help consumers, it would end up causing a wheat shortage. Ration coupons are issued to consumers so that no one can buy more than a certain amount of wheat, and this stipulated amount of wheat is sold through ration shops, also known as fair price shops, to ensure that wheat is available to everyone.

 

In general, a price ceiling combined with rationing of goods may result in the following negative consequences for consumers: (a) To purchase goods from ration shops, each consumer must wait in long lines. (b) Because the quantity of goods received from the fair price shop will not satisfy all customers, some will be willing to pay a higher price for it. This could lead to the emergence of a black market.

 

Because a price drop below a certain level is undesirable for certain goods and services, the government establishes floors or minimum prices for these goods and services. The price floor is a government-imposed lower limit on the price that can be charged for a specific good or service. Agricultural price support programmes and minimum wage legislation are two well-known examples of price floor imposition. The government imposes a lower limit on the purchase price for some agricultural goods through an agricultural price support programme, and the floor is usually set at a level higher than the market-determined price for these goods. Similarly, the government ensures that the wage rate of workers does not fall below a certain level through minimum wage legislation, and the minimum wage rate is set above the equilibrium wage rate.

 

The government imposes a lower limit on the purchase price for some agricultural goods through an agricultural price support programme, and the floor is usually set at a level higher than the market-determined price for these goods. Similarly, the government ensures that the wage rate of workers does not fall below a certain level through minimum wage legislation, and the minimum wage rate is set above the equilibrium wage rate.

 

At price p * and quantity q*, the market equilibrium would be reached. When the government sets a floor price that is higher than the equilibrium price, the market demand is qf, but the firms want to supply q ′f, resulting in an excess supply in the market equal. To prevent price falls due to excess supply in agricultural support, the government must purchase the surplus at a predetermined price. Consolidation of the budget is harmed as a result of this.