Understanding Demand and Supply: Elasticity in Economics
Introduction
In the world of economics, understanding the relationship between demand and supply is crucial. These two fundamental concepts form the backbone of how markets function and prices are determined. One key aspect of this relationship is elasticity, which measures how responsive quantity demanded or supplied is to changes in price or other factors. In this article, we'll delve deep into the concept of elasticity within the context of demand and supply curves.
What is Elasticity?
Elasticity is a measure of how sensitive the quantity demanded or supplied of a good is to changes in its price or other factors. It helps us understand how consumers and producers react to changes in market conditions. There are three main types of elasticity:
- Price Elasticity of Demand (PED)
- Price Elasticity of Supply (PES)
- Cross-price Elasticity of Demand
Let's explore each of these in detail.
Price Elasticity of Demand (PED)
Price Elasticity of Demand measures how responsive the quantity demanded of a product is to changes in its price. PED is calculated using the following formula: