Question

Write a paper of 300-600 words presenting your analysis of one of the following two topics (select one): Topic C: Select elasticity or regression and explain how the concept helps us understand economic issues.

Answer 1

Elasticity :

Elasticity can be defined as a variable's responsiveness to alteration in another variable . In economics price elasticity of demand and price elasticity of supply refers to changes in quantity demanded and supplied that occurs due to a price change . On the other hand income elasticity refers to change in demand due to change in consumer income whereas cross price elasticity is change in demand for good X for a change in price of good Y .

This concept of elasticity is useful in many fields . For price setting by a firm the elasticity for the good produced is taken into consideration . Elasticity determines tax burden , tax revenue , pattern of consumption , market structure etc .

The concept helps us to understand monopoly pricing , type of a particular good whether necessity or luxury . If a good is has inelastic demand it means that even after price change the demand remains unaffected . This shows that the good is a necessity or basic product . The opposite happens in case of a luxury good like cars .

The formula for price elasticity of demand e = % change in quantity demanded / % change in price

Elasticity also determines who will pay more taxes . The tax burden is shared between consumers and producers based on elasticity . The one with more inelastic curve shares the maximum burden .