Elasticity and its applications
In empirical work an elasticity is the estimated coefficient in a linear regression equation where both the dependent variable and the independent variable are in natural logs.
Elasticity measures how changes in market conditions can lead to a response in buyers and sellers, i. If it was inelastic, you would raise your revenue because you would have a constant, fixed number of people paying for the tickets at a higher price.
Goods which may be seen as inelastic may transition to being elastic over a period of time if the price of the good rises substantially. Marshall Afirst pub.
The Elasticity of Demand: This is how demand responds to changes in determinants. First, they never reach capital, and on some extraordinary occasions it may be expedient that even capital should contribute towards the public exigencies; and secondly, there is no certainty as to the amount of the tax, for it may not reach even income.
Frequently used elasticities include price elasticity of demandprice elasticity of supplyincome elasticity of demandelasticity of substitution between factors of production and elasticity of intertemporal substitution. Other demand elasticities[ edit edit source ] In addition to the price elasticity of demand, economists also use other elasticities to describe the behavior of buyers in a market.
Even though the slope of a linear demand curve is constant, the elasticity is not.
Uses of elasticity
Case K. Elasticity measures how changes in market conditions can lead to a response in buyers and sellers, i. We obtain the opposite result if demand is elastic: an increase in the price causes a decrease in total revenue. It is also important in these circumstances to consider statistics — prices vs. If the demand was elastic, your number of admissions would fall if you raised the prices due to the competition of other cinemas that might charge less or offer a better deal. The concept of 'Normal' versus 'Inferior' goods is also important when examining the effects that a persons income may have on their demand for certain products. E, Fair R. This can be calculated by multiplying P x Q — the price of the good multiplied by the quantity of the good which is sold for that price. Say that for instance,you are the owner of a small cinema and you are running short of funds, the logical action to take would be to change the price of the admissions. Inelastic goods are goods such as lifesaving medicines, tobacco and petrol — there are no real substitutes for these goods and they are needed, so the demand for these goods will not change despite an increase or decrease in the price. In this sense, they are an inelastic good. Other demand elasticities[ edit edit source ] In addition to the price elasticity of demand, economists also use other elasticities to describe the behavior of buyers in a market. They are so identified with price, that the contributor is hardly aware that he is paying a tax.
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