Question

Discuss examples of 1) elasticity, including an explanation of why or how they demonstrate the concept of elasticity; and 2) examples of externalities, again including an explanation of why or how they demonstrate the concept of externalities.

Answer 1

1) Elasticity - In economics, elasticity is a concept that shows the change in the aggregate quantity demanded of a good in relation to changes in price, or income,or supply.

Elasticity is measured by dividing the percentage change in quantity demanded by the percentage change in the price. If a good is elastic in demand, that means it's percentage change in quantity demanded is greater than it's percentage change in the price. If a good has inelastic demand, that means it's percentage change in the price is greater than the percentage change in the quantity demanded.

Elastic goods and services have a lot of substitutes. Example of elastic goods are automobiles, furniture, professional services, transportation etc.

Inelastic goods have less substitute options available. Example of inelastic goods are- water, power supply, medicines etc.

2) Externality is a concept that shows an economic activity's positive or negative consequences, that falls on third party who even are not involved in that activity.

Externality is of two types - positive Externality and negative Externality.

Positive Externality shows the benefit of an economic transaction enjoyed by a third party who is not involved in that transaction. For example- when one consumes higher education, that's his private benefit but it also benefits the rest of the society in terms of higher labor quality, production growth and increase in economy's output and wage rate.

Negative Externality shows the cost of an economic transaction falls on a third party who is not involved in that transaction activities. For example- Smoking is a popular example of negative Externality. Because when one smokes, it's for his private pleasure but it imposes negative Externality through greater health care system costs.