Elasticity of elasticity pertains to the changes in value due to changes in a factor's price. In elasticity economics, elasticity refers to the statistical relationship between two variables, with respect to the change in the quantity demanded. Elasticity indicates the degree to which prices move with changing supply. It basically deals with how a factor alters its own value as a result of changes in other factors. Elasticity is necessary for any market-type economic model to properly calculate the effects of changes in demand and supply on equilibrium.
The concept of elasticity was introduced by J. S. Arrow in his model of capital. He believed that there were four different kinds of elasticity, and that demand curve shapes depended on them. Elasticity in elasticity economics is measured using a function called the lagged elasticity function. This is a function that changes slowly with changing prices and is therefore not sensitive to changes in initial prices. The lag function has the ability to measure elasticity quickly, which saves time used in economic calculation.
There are basically three types of elasticity in elasticity economics. First, the elasticity curve depicts the change in demand for a commodity. In this kind of elasticity, prices tend to decrease with increasing demand and vice versa. Second, the elasticity curve depicts the change in supply of a commodity. In this kind of elasticity, increased supply tends to decrease the prices.
Thirdly, the third type of elasticity shows a point at which demand and supply meet. At this point, the elasticity curve slopes away from the zero line, making the price of goods and services relatively identical. It is used to show that there is a balance between supply and demand, so that there is no tendency for prices to rise above a certain limit. Economists often refer to these points as the equilibrium level. They also say that an equilibrium exists at a particular price level because it is equivalent to what consumers can afford. This concept is closely related to what economists call the demand-side cost of production.
All these concepts are important to economists. But they must also be understood by laymen. And it would help if they could understand the concept of elasticity economics through illustrations and graphics. Here's one such graphical illustration to explain elasticity to you:
To find the slope of an elasticity curve, start by creating a horizontal line connecting zero (the value of nothing) to higher price units (the higher price units include higher unit costs like rent and utilities). Then draw a line from the origin of the line to the lower end of the range of prices. This graph reveals the slope of the elasticity curve. You can use this graph to learn more about elasticity and how it influences the market.
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