Question

1)examples of elasticity, including an explanation of why or how they demonstrate the concept of elasticity;

2) examples of externalities, again including an explanation of why or how they demonstrate the concept of externalities.

Answer 1

Ans 1. Elasticity is the percentage in quantity demanded due to 1% change in price. For example- an increase in price of coffee will lead to consumers shifting from coffee to tea, so, demand for coffee decreases. This decrease in coffee will be more than the percentage increase in price because coffee has a close substitute in the market in the form of tea. But in case of prescription drugs, demand won't be affected by much due to price change because it is a necessity good. Thus, its demand is inelastic but demand for coffee is elastic.

Ans 2. An externality is the effect of on persons decision on the other person.

For example, higher education, if a person gets educated it not only imporves his income and standard of living but also, helps in growth of the economy. So, higher education of one person has a positive externality on the society.

In case of factory dumping waste in the river will kill the water life in the river which will reduce the harvest of fishermen, so, production by the factory has a negative externality on the fishermen in the form of low fish harvest and thus, lower income.

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