Elasticity is the ratio of the percentage change in one variable to
the percentage change in another variable. It is a tool for measuring the
responsiveness of a function to changes in parameters in a unitless way.
Frequently used elasticities include price elasticity of demand, price
elasticity of supply, income elasticity of demand, elasticity of substitution
between factors of production and elasticity of intertemporal substitution.
Elasticity is one of the most important concepts in
neoclassical economic theory. It is useful in understanding the incidence of
indirect taxation, marginal concepts as they relate to the theory of the firm,
and distribution of wealth and different types of goods as they relate to the
theory of consumer choice. Elasticity is also crucially important in any
discussion of welfare distribution, in particular consumer surplus, producer
surplus, or government surplus.
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 is a popular tool among
empiricists because it is independent of units and thus simplifies data
analysis.
Generally, an elastic variable is one which responds a lot
to small changes in other parameters. Similarly, an inelastic variable
describes one which does not change much in response to changes in other
parameters.
Mathematical
definition
The definition of elasticity is based on the mathematical
notion of point elasticity. In general, the "x-elasticity of y", also
called the "elasticity of y with respect to x", is:
The approximation becomes exact in the limit as the changes
become infinitesimal in size. The absolute value operator is for simplicity –
generally, depending on context, the sign of the elasticity is understood as
being always positive or always negative. However, sometimes the elasticity is
defined without the absolute value operator, when the sign may be either
positive or negative or may change signs. A context where this use of a signed
elasticity is necessary for clarity is the cross-price elasticity of demand —
the responsiveness of the demand for one product to changes in the price of
another product; since the products may be either substitutes or complements,
this elasticity could be positive or negative.
Specific Elasticities
Elasticities of
demand
Price elasticity of demand
Price elasticity of demand measures the percentage change in
quantity demanded caused by a percent change in price. As such, it measures the
extent of movement along the demand curve. This elasticity is almost always
negative and is usually expressed in terms of absolute value (i.e. as positive
numbers) since the negative can be assumed. In these terms, then, if the
elasticity is greater than 1 demand is said to be elastic; between zero and one
demand is inelastic and if it equals one, demand is unit-elastic. A perfectly
elastic demand curve is horizontal (with an elasticity of infinity) whereas a
perfectly inelastic demand curve is vertical (with an elasticity of 0).
Income elasticity of demand
Income elasticity of demand measures the percentage change
in demand caused by a percent change in income. A change in income causes the
demand curve to shift reflecting the change in demand. IED is a measurement of
how far the curve shifts horizontally along the X-axis. Income elasticity can
be used to classify goods as normal or inferior. With a normal good demand
varies in the same direction as income. With an inferior good demand and income
move in opposite directions.
Cross price elasticity of demand
Cross price elasticity of demand measures the percentage
change in demand for a particular good caused by a percent change in the price
of another good. Goods can be complements, substitutes or unrelated. A change
in the price of a related good causes the demand curve to shift reflecting a
change in demand for the original good. Cross price elasticity is a measurement
of how far, and in which direction, the curve shifts horizontally along the
x-axis. A positive cross-price elasticity means that the goods are substitute
goods.
Cross elasticity of demand between firms
Conjectural variation
Cross elasticity of demand for firms, sometimes referred to
as conjectural variation, is a measure of the interdependence between firms. It
captures the extent to which one firm reacts to changes in strategic variables
(price, quantity, location, advertising, etc.) made by other firms.
Elasticity of
intertemporal substitution
Combined Effects
It is possible to consider the combined effects of two or
more determinant of demand. The steps are as follows: PED = (∆Q/∆P) x P/Q.
Convert this to the predictive equation: ∆Q/Q = PED(∆P/P) if you wish to find
the combined effect of changes in two or more determinants of demand you simply
add the separate effects: ∆Q/Q = PED(∆P/P) + YED(∆Y/Y)[12]
Remember you are still only considering the effect in demand
of a change in two of the variables. All other variables must be held constant.
Note also that graphically this problem would involve a shift of the curve and
a movement along the shifted curve.
Elasticities of
supply
Price elasticity of supply
The price elasticity of supply measures how the amount of a
good firms wish to supply changes in response to a change in price. In a
manner analogous to the price elasticity of demand, it captures the extent of
movement along the supply curve. If the price elasticity of supply is zero the
supply of a good supplied is "inelastic" and the quantity supplied is
fixed.
Elasticities of scale
Returns to scale
Elasticity of scale or output elasticities measure the
percentage change in output induced by a percent change in inputs. A production function or process is said to
exhibit constant returns to scale if a percentage change in inputs results in
an equal percentage in outputs (an elasticity equal to 1). It exhibits
increasing returns to scale if a percentage change in inputs results in greater
percentage change in output (an elasticity greater than 1). The definition of
decreasing returns to scale is analogous.
Applications
The concept of elasticity has an extraordinarily wide range
of applications in economics. In particular, an understanding of elasticity is
fundamental in understanding the response of supply and demand in a market.
Some common uses of elasticity include:
- Effect of changing price on firm revenue.
- Analysis of incidence of the tax burden and other government policies.
- Income elasticity of demand can be used as an indicator of industry health, future consumption patterns and as a guide to firms investment decisions. See Income elasticity of demand.
- Effect of international trade and terms of trade effects.
- Analysis of consumption and saving behavior.
- Analysis of advertising on consumer demand for particular goods.
Variants
In some cases the discrete (non-infinitesimal) arc
elasticity is used instead. In other cases, such as modified duration in bond
trading, a percentage change in output is divided by a unit (not percentage)
change in input, yielding a semi-elasticity instead.
कोई टिप्पणी नहीं:
एक टिप्पणी भेजें