Elasticity în economy

This paper focuses on the study of elasticity of substitution, price and wealth. We live in a fast paced word, based on consumption, a world that is continuously changing. This essay puts forward the main elements that are used in order to calculate these changes. Anyway, the principle from which derives the entire economic system is the existence of scarcity and the necessity of choice. Therefore, this issue concerns us all; we are interested in satisfying our needs, at the highest quality, at the lowest price, at the wanted quantity and so on. This will bring our wealth status. I will try to present this by using statistic tables, equations and other methods that economists have tried to discover along time.

KEY WORDS:

price elasticity, substitution elasticity, wealth elasticity, scarcity, supply, demand.

INTRODUCTION

Elasticity is a measure of the response of people to changes in economic variables. How large is the response of producers and consumers to changes in price? Before business firms and the government decide to change prices and taxes, they must anticipate the magnitude of response by those affected. Commonly analyzed are elasticity of substitution, price and wealth. Elasticity is a popular tool among empiricists because it is independent of units and thus simplifies data analysis

1. MATHEMATICAL DEFINITION

In economics, the definition of elasticity is based on the mathematical notion of point elasticity. Elasticity can be calculated for any function but in empirical work it is commonly used to analyze supply or demand. Let be the demand (supply) of goods as a function of parameters price and wealth, and let be the demand for good The general definition, according to Mas-Collel, Winston and Green is:

Elasticity can be approximated using percent changes:

,

where and similarly for and

Another way to approximate elasticity is using the average value:

It is typical to represent elasticity as "E", "e" or lowercase epsilon," ".

2. APPLICATIONS

As the price of a good rises, consumers will usually demand a lower quantity of that good; they may consume less of that good, substitute it with another product, etc. The greater the extent to which demand falls as price rises, the greater the price elasticity of demand. Conversely, as the price of a good falls, consumers will usually demand a greater quantity of that good: consuming more, dropping substitutes, etc. However, there may be some goods of which consumers cannot consume less or for which adequate substitutes cannot be found. Prescription drugs, fuel, and food are some examples of these. For such goods, demand does not greatly decrease as the price rises, and elasticity of demand can be considered low.

Further, elasticity will normally be different in the short term and the long term. For example, for many goods the supply can be increased over time by locating alternative sources, investing in an expansion of production capacity, or developing competitive products which can substitute. One might therefore expect that the price elasticity of supply will be greater in the long term than the short term for such a good, that is, that supply can adjust to price changes to a greater degree over a longer time.

This applies to the demand side as well. For example, if the price of petrol rises, consumers will find ways to conserve their use of the resource. However, some of these ways, like finding a more fuel-efficient car, take time. So consumers as well may be less able to adapt to price shocks in the short term than in the long term.

The concept of elasticity has an extraordinarily wide range of applications in economics. In particular, an understanding of elasticity is useful to understand the dynamic response of supply and demand in a market, in order to achieve an intended result or avoid unintended results. For example, a business considering a price increase might find that doing so lowers profits if demand is highly elastic, as sales would fall sharply. Similarly, a business considering a price cut might find that it does not increase sales, if demand for the product is price inelastic.

ASE, Faculatea de Relatii Economice Internationale