This from where consumers demand arises, how
This report will brief two main topics in the world of micro-economics, Elasticity and Market structures. The first part will be the explanations of any two types of elasticity with examples and diagrams. The other section will be about any two market structures with comparisons between them.
Elasticity is largely the behaviour of product markets and degree of responsiveness of quantity demanded and supplied of a commodity to correlation with the consumers income and producers price. It tells from where consumers demand arises, how businesses makes decisions and how prices and profits efficiently coordinate the allocation of scare resources in a perfectly competitive market. (Samuelson et al., 1995). There are two kinds of elasticity, Elastic is when the price has a huge affect on the demand or supply, like tea, coffee. Inelastic is when the price does not have a vast affect on the demand or supply. For example., necessities like salt, and precious items like jewellery. There are four main types of elasticity price, income and cross elasticity of demand and price elasticity of supply.
Price elasticity of demand (PED)
It measures the responsiveness of demand after a change in price. (Pettinger, 2016). Price elasticity can be calculated by:
PED = % change in quantity demanded
% change in price
The different classification for price elasticity are:
1. Perfectly elastic demand: When goods are bought at the going price but nothing at all if the price rises slightly. For example; International students prefer buying daily wear clothes from Primark but if the prices rise, they will switch to brands as there will not be a massive difference between the two.
D Ep = ?
2. Perfectly inelastic demand: When the price has no affect on the change of quantity demanded, like necessities, medicines.
Ep = 0
3. Unitary elastic demand: When the percentage change in price is equal to the percentage in quantity demanded. Such a demand curve is referred to as a rectangular hyperbola.
0 Quantity Ep = 1
4. Relatively inelastic demand: When a change in price leads to a smaller percentage change in demand. For example; necessities, goods that are addictive or have few close substitutes. (Pettinger, 2016).
Ep < 1 0 Quantity 5. Relatively elastic demand: When a change in price leads to a bigger percentage change in demand. They are mainly luxury and expensive goods. (Pettinger, 2016). Price D Ep > 1
Elasticity does not depend upon units, some actual calculations are needed:
1. Point elasticity of demand: It is the elasticity on a point of the demand curve. It is formed by multiplying the inverse of the slope at the point by a ratio. (Morgan, Katz and Rosen, 2006)
2. Arc elasticity of demand: It is the elasticity measured over a finite range or ‘arc’ of a demand curve. (Sethi and Andrews, 2017)
3. Percentage or proportionate method: It is measured by the ratio of percentage change in the quantity demanded to a percentage change in price of the commodity. (Sethi and Andrews, 2017)
4. Total expenditure: It is the amount of money consumers spend on a commodity.
Total Expenditure = P*Q
Income elasticity of demand(YED)
It is a measure of how much the demand for a good is affected by changes in consumers’ incomes. (Krugman and Wells, 2013). It helps to differentiate between a normal or an inferior good. It also tells us how demand responds to changes in income. Economists often use to predict which industries will grow most rapidly as the income of consumers grow over time. (Krugman and Wells, 2013).
YED = % change in quantity demanded
% change in income
Types of income elasticity of demand are:
1. Positive income elasticity: YED is said to be positive when the quantity demanded at a given price increases with an increase in income. Commodities that have a positive nature are called ‘normal’ goods. They are classified into:
a. Income elastic: When income rises, the demand for such goods rises faster than income. Elasticity is greater than 1. For example, luxury items.
b. Income inelastic: When income rises, the demand for such goods rises steadily. Elasticity is less than 1 but positive. For example, necessities.
c. Unitary income elasticity: When the change in income is equal to the change in price. Elasticity is equal to unity.
2. Negative income elasticity: When quantity demanded at any given price decreases as income increases. These goods are negative in nature and are referred as ‘inferior’ goods. For example; maize and pearl millet.
3. Zero income elasticity: When income increases but quantity demanded remains unchanged. For example; inexpensive essential goods.
The market structure refers to the number which affect the level of competition in the market. Neo-classical theory of the firms distinguishes a number of market structures, each with its own characteristics and assumptions. Structures are classified in term of the presence or absence of competition. When competition is absent, the market is said to be concentrated. There is a spectrum, from perfect competition to pure monopoly. (Economics online, 2018)
It is a single supplier to a market. This firm may choose to produce at any point on the demand curve. (Snyder and Nicholson, 2008). The products sold will be of lesser quantity and higher price. This imposes a cost on society because fewer consumers buy the product, and those who do not pay more for it. This is why antitrust laws exist which forbid firms from monopolizing most markets. (Pindyck and Rubinfeld, 2005).