WHAT IS MICROECONOMICS?
Microeconomics is one of the branches of the economy, which means the microeconomic analysis and study of the behaviour of the consumer and the company in the amount of the limited resources in the world to understand their decision-making process. Which is how to interact with the seller and the buyer, which in turn determine the amount of supply and demand leading to change prices for products relative to productivity?
Elasticity
In economics, elasticity is the degree to which individuals (consumers or producers) will change their demand/amount supplied in response to price or income changes.
It is a measure of how much buyers and sellers respond to changes in market conditions. Elasticity allows analyze supply and demand with greater precision, If something is elastic it is responsive, flexible, or readily changed.
If you take a rubber band it is elastic and if you apply little force it will easily stretch, but a chain on the other hand is rigid and changes very little when you pull it. Here in price elasticity of demand, you can compare the price change to the force applied to a rubber band or chain and the change in quantity demanded is comparable that stretch
PRICE ELASTICITY OF DEMAND
The demand law says that if the demand for a product decreases with increase in its price and its demand increases with the decrease in its price. Similarly demand for a product changes in response to the change in its price. This change in demand takes place due to a certain feature. This feature is called “Elasticity of demand”.
Prof. Alfred Marshall presented the concept of elasticity of demand, he writes.
“Elasticity of demand is the change in quantity demanded of a commodity to a change in its price” when price goes up, consumers demand fewer quantities of a product. But if the price of a product falls, quantity demanded will rise
But when the price of a product changes, how much more (or less) will consumers buy? To help answer this question, the measurement we use is called the Price Elasticity of Demand.
It is the percentage change in quantity demanded given a percent change in the price.
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you used to buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:
A train company would like to know what would happen to demand for its services, and therefore the revenue it earns from tickets, if it increased its fares. Increasing fares in peak periods when many people have to travel by train to work and then back from work in busy places that may have very little impact on demand because many people have few or no alternatives. Journeys by car or bus may take too long, the traveler may not own a car, or car parking in the city is too expensive. However, raising train fares for journeys off-peak and on weekends may cause demand, and therefore revenue, to fall significantly because people may decide against travelling and spend their leisure time doing something else or travelling by car or bus because the roads are not so busy.
Similarly, a government would want to calculate how much tax revenue it could expect from a tax placed on a particular good or service. For example, many government levy excise taxes on cigarettes to discourage people, despite the tax many people continue to smoke which in turn provides the government with a stream of tax revenue from the sale of cigarettes.
RANGES OF ELASTICITY IN DEMAND
INELASTIC DEMAND
• Quantity demanded does not respond strongly to the change in price
• Price elasticity of demand is less than one
ELASTIC DEMAND
• Quantity demanded responds strongly to price changes.
• Price elasticity of demand is more than one
PERFECTLY INELASTIC
• Quantity demanded does not respond to price changes
PERFECTLY ELASTIC
• infinite changes in quantity demanded with any change in price
UNIT ELASTIC
• same changes in quantity demanded as the price
DETERMENANTS OF THE ELASTICITY OF DEMAND
AVAILABLE CLOSE SUBSTITUTES
• The more number of close substitutes of a product the more elastic it becomes.
• If there are many flower shops in the city and one flower shop increases its price, the quantity demanded decreases since there are many other shops with a similar product.
PERCENT OF INCOME
• The percent of income spent on the good influences the elasticity of demand
• The greater percent of income spent on the good the more elastic it becomes, all else held constant.
LUXURY OR NECESSITY?
• Those items that are a necessities in life are more inelastic than items that are a luxury
• Food in general, salt, and life saving medical care are examples of necessities and have lower price elasticity than luxury items such as: jewelry, yachts, or vacation travel.
TIME PERIOD
• The longer the time period, the more elastic a good becomes as more substitutes become available
• If the price of gas doubled, car owners would still need to buy gas.
• But in time, they may choose to trade their larger vehicle in for one that is more fuel efficient or uses an alternative fuel, or even choose to move to a different apartment so that they are closer to work or able to use an alternative methods of public transportation such as a subway, train or bus line
MARKET DEFINATION
• The last determinant of own price elasticity is the market definition. The broader the definition the fewer number of close available substitutes exist
• If a single gas station in town raises its price, there are several other gas stations in town that sell a very similar product, thus the gas at a particular station tends to be elastic.
• However, if we look at the entire market for gas, there are few substitutes and the own price elasticity is inelastic.
ELASTICITY OF SUPPLY
The supply law says that when the price of a product increases its supply also increases and when its price decreases its supply also decreases. This change in supply occurs because of its certain feature which is called elasticity of supply.
It is the degree of responsiveness of supply of a commodity to change in its price.
RANGES IN SUPPY ELASTICITY
PERFECT INELASTIC SUPPLY
• We say that the elasticity of supply is zero when with the change in price, the quantity supplied of a good remains unchanged.
RELATIVLY LESS ELASTIC SUPPLY
• Elasticity of supply is less than one if as a result of a change in the price of a good its supply changes less than proportionately.
RELATIVELY GREATER ELASTIC SUPPLY
• If elasticity of supply is greater than one, when the quantity supplied of a good is changed substantially in response to small change in price of the good.
UNIT ELASTIC SUPPLY
• it is unitary elastic if the relative change in the quantity supplied is exactly equal to the relative change in price.
PERFECT ELASTIC SUPPLY
• The supply elasticity is infinite when nothing is supplied at a lower price but a small increase in the price causes supply to rise from zero to an indefinitely large amount indicating that producers will supply any quantity demanded at that price.
DETERMINANTS OF SUPPLY ELASTICITY
PRODUCT TYPE
Type of product impacts how quickly a producer will be able to respond to a change in price. A manufacturing firm may be able to quickly adjust production levels with some minor adjustments in the equipment whereas other products such as apples require several years to establish a new orchard. Since child care services require relatively few skills compared to those of a physician, the supply elasticity of child care services is more elastic than that of physician services.
TIME
Time is the key determinant of supply. In the case of apples and some other agriculture products, the immediate elasticity of supply is very inelastic, i.e., there are so many apples available for sale today. However, with time producers respond to the increase in price, manufacturing firms can build new facilities, farmers can plant additional acres to a particular crop. Thus in time, the elasticity of supply becomes more elastic.
PRODUCTION CAPACITY
If already a firm is operating at full capacity, then to increase supply we would require building additional facilities and purchasing new equipments. A firm that operates below full capacity can respond to a price increase quicker than a firm that is already at full capacity.
INPUT SUBSTITUTION – FLEXIBILITY AND MOBILITY
Another determinant is input substitution. As the price of good increases, how easily the inputs that were used in the production of another good be switched to producing the good with the higher price?