Question

Elasticities are one measure firms need to understand to effectively price their product and make price changes.

Explain what an elasticity is and what it measures.

• What might be an example of a more elastic good?
• What might be an example of a more inelastic good? Explain why.
• What importance do you feel it is for firms to understand the elasticity of their products they are selling?

Answer 1

Elasticity is a measure of a variables sensitivity to a change in another variable. Elasticity refers the degree to which individuals, consumers or producer change their demand or the amount supplied in response to price or income changes. Elasticity is an economic concept used to measure the change in the aggregate quantity demanded for a good or a service. Furniture, motor vehicles are more elastic goods and water, electricity are the examples for inelastic goods. They are so called because the price change doesnot affect the quantity demanded and they have fewer substitutes. It is important to understand that if the products that a company sells is elastic or inelastic so that he can take adequate measure whenever an unexpected change happens.