General Discussion

About
Elasticity
(BE121 Microeconomics)

Submitted by:
Macalos, Kate Stephanie
Baylon, Dannah Victoria
Ordaniza, Jovelyn
Vallejo, Nicole Kate

Submitted to:
Rex Lord Ranalan

Elasticity
Introduction
A change in buyers' and sellers' behavior in reaction to a change in the price of a
good or service is referred to as elastic behavior in economics. In other words, the
degree to which demand for a thing or service changes as its price rises or falls, is what
is known as its demand elasticity or inelasticity. A product is considered inelastic if
people keep buying it in spite of price changes. The availability of near substitutes, the
product's relative cost, and the length of time since the price adjustment can all affect a
good or service's elasticity.
According to their propensity to be price-takers or those who must accept market
prices, businesses that operate in very competitive industries offer elastic goods or
services. Sellers and purchasers swiftly modify their demand for a commodity or service
when the price approaches the point of elasticity. Inelastic is the polar opposite of
elastic. When a good or service's demand is inelastic, both suppliers and purchasers
are less likely to modify it in response to price changes.
Elasticity is a crucial economic metric because it shows how much of an item or
service consumers consume when the price varies, which is especially essential for
businesses that sell goods or services. When a product's price changes quickly, the
amount that is demanded also changes. When a good's demand is inelastic, its supply
does not change significantly even when its price does. For an elastic good, the shift
that is seen is a rise in demand when the price falls and a fall in demand when the price
rises.

Background information
Elasticity refers to the degree of responsiveness in supply or demand in relation
to changes in price. If a curve is more elastic, then small changes in price will cause
large changes in quantity consumed. If a curve is less elastic, then it will take large
changes in price to effect a change in quantity consumed. Graphically, elasticity can be
represented by the appearance of the supply or demand curve. A more elastic curve will
be horizontal, and a less elastic curve will tilt more vertically. When talking about
elasticity, the term "flat" refers to curves that are horizontal; a "flatter" elastic curve is
closer to perfectly horizontal.
The degree to which demand quantity responds to price is referred to as price
elasticity of demand, often known as the elasticity of demand. Have a look at the
scenario in the graph below where demand is extremely elastic, or where the curve is
nearly flat. You can see that the quantity reduces significantly if the price goes from $.75
to $1. The causes of this occurrence could be for a variety of reasons. Customers could
find it simple to find alternatives to the good, making them less tolerant of price changes
when they occur. It's possible that the buyers don't care all that much about the product,
therefore a tiny adjustment in price has a significant impact on their desire for it. Large
variations in price won't have much of an impact on the quantity sought if the demand is
relatively inelastic. In the inelastic curve below, a price increase of a whole dollar
reduces demand by just two units, as opposed to the elastic curve in the figure before
where a change of 25 cents reduced quantity by 6 units. With inelastic curves, a very
significant change in price is required to alter the level of demand in the graph below.
This predicament might be explained by the fact that the good is a necessary good that
cannot be easily replaced by other products. Customers must actually desire or need a
product with an inelastic curve in order to purchase it; otherwise, they will look
elsewhere. This implies that regardless of price, buyers will need to purchase the same
quantity of the product each week.
The degree to which supply is responsive to price varies, much like demand, and
is known as the elasticity of supply or price elasticity of supply. An elastic supplier (one
with a flatter supply curve) will adjust the quantity supplied in response to changes in
price, whereas an inelastic supplier (one with a steeper supply curve) will constantly
supply the same number of items, regardless of the price.

How Is Elasticity Measured?

As we've mentioned, elasticity can be roughly evaluated by observing how steep
or flat a supply or demand curve is in comparison. That the formula for calculating
elasticity is the same as the formula for calculating slope follows makes sense.
Nevertheless, elasticity depicts the relationship between changes in price and quantity
rather than the actual prices and quantities of items. Divide the percent change in
quantity by the percent change in price to find the coefficient of elasticity:
Elasticity = (% Change in Quantity)/ (% Change in Price)

Remember that to find percent change itself, you divide the amount of change in a
variable by the initial level of the variable:

% Change = (Amount of Change)/ (Initial Level)

Remember that percentage changes might be positive or negative, but that
elasticity is always an absolute value. This is another crucial point. That is, the elasticity
will be positive even when an increase in price is accompanied by a fall in quantity (as
with the majority of demand curves); keep in mind to remove any minus signs when
calculating the elasticity's final value.

Importance of Elasticity in Business

The success of a corporation depends on knowing whether or not its products or
services are elastic. High elasticity businesses ultimately compete with other companies
on pricing and need a large number of sales transactions to stay afloat. On the other
hand, inelastic businesses have must-have products and services and can afford to
charge more for them.
 Beyond just affecting costs, a product's or service's elasticity has a direct impact
on a business's client retention rates. Companies frequently try to sell products or
services that have inelastic demand, which suggests that consumers will stick with the
product or service and continue to buy it even if the price is raised.
We come into contact with a lot of elasticity in the actual world on a daily basis.
Uber's surge pricing is an intriguing modern illustration of the price elasticity of demand,
in which many individuals participate even if they are unaware of it. As you may be
aware, Uber employs a "surge pricing" algorithm whenever a disproportionately high
number of users in a certain location seek rides. Uber's use of a price multiplier by the
corporation enables real-time supply and demand balancing.
The COVID-19 pandemic's effects on several industries have also brought
attention to the price elasticity of demand. For instance, a spate of coronavirus
outbreaks in meat-processing facilities across the US, along with the slowdown in global
trade, resulted in a local meat shortage and a 16% spike in import costs in May 2020—
the highest increase on record since 1993.
The oil business has provided yet another outstanding illustration of COVID-19's
impact on flexibility. Despite the fact that oil is typically very inelastic, meaning that
demand has little effect on the price per barrel, on April 20, 2020, crude petroleum
actually traded at a loss in the intraday futures market due to a historic drop in global
demand for oil during March and April, as well as increased supply and a lack of storage
space.

Price elasticity of demand affect pricing decisions

Price elasticity of demand describes how much demand for a good reacts to price
fluctuations. The price elasticity of demand for a commodity is influenced by a variety of
factors, including the availability of near substitutes, the commodity's type, its share of
total expenditure, the price level, the amount of income, and others.
Every action has an equal and opposite response, according to Newton's third
law of motion. Despite the fact that this law deals with moving items, the same idea may
be applied to pricing. There is often an opposite reaction and a decrease in sales when
an activity raises pricing. On the other hand, when prices decline, sales may rise.
Since the first marketplaces in human history, this is one of the most fundamental
ideas in retail pricing that has aided merchants in balancing their goals for sales and
margins. Now, the word equal is the exception to Newton's third law in pricing. Price
changes won't always result in an equal response in sales. Elasticity is what controls
that level of responsiveness.
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