What is elasticity?

Elasticity is a measure of how much buyers and seller respond to changes in market conditions.

How are the ff to be computed?

1) Price of elasticity of demand

Economists measure the degree to which demand is price elastic or inelastic with the coefficient E d,

Where:

Ed > 1, demand is elastic

Ed = 1, demand is unit elastic

Ed < 1, demand is inelastic

Extreme cases:

Ed = 0, Perfectly inelastic

Ed = ∞, infinite amount to zero

2) Price elasticity of supply

We measure the degree of price elasticity or inelasticity of supply with the coefficient E s

Where:

Es > 1, supply is elastic

Es = 1, supply is unit elastic

Es < 1, supply is inelastic

Es is never negative.
3) Income elasticity

Income elasticity of demand measures the degree to which consumers respond to a change in their incomes by
buying more or less of a particular good. The coefficient of income elasticity of demand Ei.

Where:

Ei > 0, Normal or Superior Good

Ei < 0, Inferior Good

4) Cross price elasticity of demand

The cross elasticity of demand measures how sensitive consumer purchases of one product (say, X) are to a
change in the price of some other product (say, Y). We calculate the coefficient of cross elasticity of demand. E xy
just as we do the coefficient of simple price elasticity, except that we relate the percentage change in the
consumption of X to the percentage change in the price of Y:

Where,

Exy > 0, Substitutes

Exy = 0, Independent good
Exy < 0, Complements
Distinguish the following:

1) Fixed Cost
a. costs that in total do not vary with changes in output. Fixed costs are associated with the very
existence of a firm’s plant and therefore must be paid even if its output is zero.
2) Variable Cost
a. costs that change with the level of output. They include payments for materials, fuel, power,
transportation services, most labor, and similar variable resources.
3) Average Cost
a. The Average Cost is the per unit cost of production obtained by dividing the total cost (TC) by the
total output (Q).
b. average-cost data are more meaningful for making comparisons with product price, which is
always stated on a per-unit basis.
4) Marginal Cost
a. is the extra, or additional, cost of producing one more unit of output. MC can be determined for
each added unit of output by noting the change in total cost that unit’s production entails

5) Average Variable Cost

a. As added variable resources increase output, AVC declines initially, reaches a minimum, and then
increases again.
b. for any output level is calculated by dividing total variable cost (TVC) by that output (Q):

6) Average Fixed Cost

a. Because the total fixed cost is, by definition, the same regardless of output, AFC must decline as
output increases. As output rises, the total fixed cost is spread over a larger and larger output.
b. For any output level is found by dividing total fixed cost (TFC) by that output (Q). That is,